UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018March 31, 2019
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
Commission File Number0-18277
VICOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 04-2742817 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
25 Frontage Road, Andover, Massachusetts 01810
(Address of Principal Executive Office)
(978)470-2900
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☒ | |||||
Smaller reporting company | ☐ | |||||
Accelerated filer | ☐ | Emerging growth company | ☐ | |||
Non-accelerated filer | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the issuer’s classes of Common Stock as ofJuly 24, 2018April 19, 2019was:
Common Stock, $.01 par value | ||||
Class B Common Stock, $.01 par value | 11,758,218 |
VICOR CORPORATIONVICORCORPORATION
INDEX TO FORM10-Q
Part I – Financial Information
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 53,920 | $ | 44,230 | $ | 66,614 | $ | 70,557 | ||||||||
Accounts receivable, less allowance of $226 in 2018 and $159 in 2017 | 45,056 | 34,487 | ||||||||||||||
Accounts receivable, less allowance of $131 in 2019 and $224 in 2018 | 41,705 | 43,673 | ||||||||||||||
Inventories, net | 41,753 | 36,499 | 51,589 | 47,370 | ||||||||||||
Other current assets | 4,102 | 3,616 | 3,880 | 3,460 | ||||||||||||
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Total current assets | 144,831 | 118,832 | 163,788 | 165,060 | ||||||||||||
Long-term deferred tax assets, net | 185 | 210 | 266 | 265 | ||||||||||||
Long-term investments, net | 2,581 | 2,525 | 2,546 | 2,526 | ||||||||||||
Property, plant and equipment, net | 40,433 | 41,356 | 55,642 | 50,432 | ||||||||||||
Other assets | 2,813 | 2,801 | 2,762 | 2,785 | ||||||||||||
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Total assets | $ | 190,843 | $ | 165,724 | $ | 225,004 | $ | 221,068 | ||||||||
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Liabilities and Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 11,219 | $ | 9,065 | $ | 11,177 | $ | 16,149 | ||||||||
Accrued compensation and benefits | 11,049 | 9,891 | 9,410 | 10,657 | ||||||||||||
Accrued expenses | 2,535 | 2,989 | 2,166 | 2,631 | ||||||||||||
Operating lease liabilities | 1,678 | — | ||||||||||||||
Sales allowances | 550 | — | 617 | 548 | ||||||||||||
Accrued severance charge | 350 | — | ||||||||||||||
Accrued severance and other charges | 49 | 234 | ||||||||||||||
Income taxes payable | 526 | 300 | 182 | 710 | ||||||||||||
Deferred revenue | 4,610 | 5,791 | 5,454 | 5,069 | ||||||||||||
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Total current liabilities | 30,839 | 28,036 | 30,733 | 35,998 | ||||||||||||
Long-term deferred revenue | 267 | 303 | 214 | 232 | ||||||||||||
Contingent consideration obligations | 506 | 678 | 378 | 408 | ||||||||||||
Long-term income taxes payable | 195 | 195 | 240 | 238 | ||||||||||||
Other long-term liabilities | 98 | 93 | ||||||||||||||
Long-term operating lease liabilities | 2,747 | 102 | ||||||||||||||
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Total liabilities | 31,905 | 29,305 | 34,312 | 36,978 | ||||||||||||
Commitments and contingencies (Note 12) | ||||||||||||||||
Equity: | ||||||||||||||||
Vicor Corporation stockholders’ equity: | ||||||||||||||||
Class B Common Stock | 118 | 118 | 118 | 118 | ||||||||||||
Common Stock | 399 | 401 | 403 | 402 | ||||||||||||
Additionalpaid-in capital | 188,276 | 181,395 | 195,799 | 193,457 | ||||||||||||
Retained earnings | 109,078 | 93,605 | 133,286 | 129,000 | ||||||||||||
Accumulated other comprehensive loss | (401 | ) | (478 | ) | (436 | ) | (394 | ) | ||||||||
Treasury stock, at cost | (138,927 | ) | (138,927 | ) | (138,927 | ) | (138,927 | ) | ||||||||
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Total Vicor Corporation stockholders’ equity | 158,543 | 136,114 | 190,243 | 183,656 | ||||||||||||
Noncontrolling interest | 395 | 305 | 449 | 434 | ||||||||||||
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Total equity | 158,938 | 136,419 | 190,692 | 184,090 | ||||||||||||
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Total liabilities and equity | $ | 190,843 | $ | 165,724 | $ | 225,004 | $ | 221,068 | ||||||||
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See accompanying notes.
-1-
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Net revenues | $ | 74,196 | $ | 57,709 | $ | 139,465 | $ | 112,171 | $ | 65,725 | $ | 65,269 | ||||||||||||
Cost of revenues | 38,313 | 31,779 | 73,371 | 62,589 | 34,639 | 35,058 | ||||||||||||||||||
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Gross margin | 35,883 | 25,930 | 66,094 | 49,582 | 31,086 | 30,211 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Selling, general and administrative | 15,814 | 14,536 | 31,213 | 28,559 | 15,373 | 15,399 | ||||||||||||||||||
Research and development | 11,403 | 11,932 | 22,529 | 22,939 | 11,220 | 11,126 | ||||||||||||||||||
Severance charge | 350 | — | 350 | — | ||||||||||||||||||||
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Total operating expenses | 27,567 | 26,468 | 54,092 | 51,498 | 26,593 | 26,525 | ||||||||||||||||||
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Income (loss) from operations | 8,316 | (538 | ) | 12,002 | (1,916 | ) | ||||||||||||||||||
Income from operations | 4,493 | 3,686 | ||||||||||||||||||||||
Other income (expense), net: | ||||||||||||||||||||||||
Total unrealized gains onavailable-for-sale securities, net | 33 | 39 | 56 | 57 | 20 | 23 | ||||||||||||||||||
Less: portion of gains recognized in other comprehensive income (loss) | (31 | ) | (36 | ) | (52 | ) | (51 | ) | ||||||||||||||||
Less: portion of gains recognized in other comprehensive income | (19 | ) | (21 | ) | ||||||||||||||||||||
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Net credit gains recognized in earnings | 2 | 3 | 4 | 6 | 1 | 2 | ||||||||||||||||||
Other income (expense), net | (46 | ) | 357 | 382 | 679 | 238 | 428 | |||||||||||||||||
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Total other income (expense), net | (44 | ) | 360 | 386 | 685 | 239 | 430 | |||||||||||||||||
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Income (loss) before income taxes | 8,272 | (178 | ) | 12,388 | (1,231 | ) | ||||||||||||||||||
Income before income taxes | 4,732 | 4,116 | ||||||||||||||||||||||
Less: Provision for income taxes | 363 | 267 | 497 | 168 | 426 | 134 | ||||||||||||||||||
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Consolidated net income (loss) | 7,909 | (445 | ) | 11,891 | (1,399 | ) | ||||||||||||||||||
Consolidated net income | 4,306 | 3,982 | ||||||||||||||||||||||
Less: Net income attributable to noncontrolling interest | 49 | 14 | 88 | 34 | 20 | 39 | ||||||||||||||||||
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Net income (loss) attributable to Vicor Corporation | $ | 7,860 | $ | (459 | ) | $ | 11,803 | $ | (1,433 | ) | ||||||||||||||
Net income attributable to Vicor Corporation | $ | 4,286 | $ | 3,943 | ||||||||||||||||||||
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Net income (loss) per common share attributable to Vicor Corporation: | ||||||||||||||||||||||||
Net income per common share attributable to Vicor Corporation: | ||||||||||||||||||||||||
Basic | $ | 0.20 | $ | (0.01 | ) | $ | 0.30 | $ | (0.04 | ) | $ | 0.11 | $ | 0.10 | ||||||||||
Diluted | $ | 0.19 | $ | (0.01 | ) | $ | 0.29 | $ | (0.04 | ) | $ | 0.10 | $ | 0.10 | ||||||||||
Shares used to compute net income (loss) per common share attributable to Vicor Corporation: | ||||||||||||||||||||||||
Shares used to compute net income per common share attributable to Vicor Corporation: | ||||||||||||||||||||||||
Basic | 39,709 | 39,172 | 39,594 | 39,121 | 40,229 | 39,479 | ||||||||||||||||||
Diluted | 40,646 | 39,172 | 40,406 | 39,121 | 41,029 | 40,167 |
See accompanying notes.
-2-
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Consolidated net income (loss) | $ | 7,909 | $ | (445 | ) | $ | 11,891 | $ | (1,399 | ) | ||||||
Foreign currency translation (losses) gains, net of tax (1) | (215 | ) | (40 | ) | 27 | 104 | ||||||||||
Unrealized gains onavailable-for-sale securities, net of tax (1) | 31 | 36 | 52 | 51 | ||||||||||||
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Other comprehensive income (loss) | (184 | ) | (4 | ) | 79 | 155 | ||||||||||
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Consolidated comprehensive income (loss) | 7,725 | (449 | ) | 11,970 | (1,244 | ) | ||||||||||
Less: Comprehensive income attributable to noncontrolling interest | 32 | 11 | 90 | 42 | ||||||||||||
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Comprehensive income (loss) attributable to Vicor Corporation | $ | 7,693 | $ | (460 | ) | $ | 11,880 | $ | (1,286 | ) | ||||||
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Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Consolidated net income | $ | 4,306 | $ | 3,982 | ||||
Foreign currency translation (losses) gains, net of tax (1) | (66 | ) | 242 | |||||
Unrealized gains onavailable-for-sale securities, net of tax (1) | 19 | 21 | ||||||
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Other comprehensive (loss) income | (47 | ) | 263 | |||||
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Consolidated comprehensive income | 4,259 | 4,245 | ||||||
Less: Comprehensive income attributable to noncontrolling interest | 15 | 58 | ||||||
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Comprehensive income attributable to Vicor Corporation | $ | 4,244 | $ | 4,187 | ||||
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(1) | The deferred tax assets associated with cumulative foreign currency translation gains and cumulative unrealized gains onavailable-for-sale securities are completely offset by a tax valuation allowance as of |
See accompanying notes.
-3-
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Operating activities: | ||||||||||||||||
Consolidated net income (loss) | $ | 11,891 | $ | (1,399 | ) | |||||||||||
Adjustments to reconcile consolidated net income (loss) to net cash provided by (used for) operating activities: | ||||||||||||||||
Consolidated net income | $ | 4,306 | $ | 3,982 | ||||||||||||
Adjustments to reconcile consolidated net income to net cash used for operating activities: | ||||||||||||||||
Depreciation and amortization | 4,539 | 4,346 | 2,445 | 2,269 | ||||||||||||
Stock-based compensation expense, net | 1,916 | 541 | 773 | 736 | ||||||||||||
Provision for doubtful accounts | 65 | 8 | ||||||||||||||
Decrease in long-term income taxes payable | — | (7 | ) | |||||||||||||
(Benefit) provision for doubtful accounts | (88 | ) | 32 | |||||||||||||
Increase in long-term income taxes payable | 2 | 5 | ||||||||||||||
Increase in other long-term liabilities | 5 | 87 | — | 2 | ||||||||||||
Decrease in long-term deferred revenue | (36 | ) | (35 | ) | (18 | ) | (18 | ) | ||||||||
Gain on disposal of equipment | (16 | ) | (23 | ) | (9 | ) | (14 | ) | ||||||||
Deferred income taxes | 25 | 17 | (1 | ) | (3 | ) | ||||||||||
Credit gain onavailable-for-sale securities | (4 | ) | (6 | ) | (1 | ) | (2 | ) | ||||||||
Change in current assets and liabilities, net | (9,857 | ) | (4,232 | ) | (9,529 | ) | (7,801 | ) | ||||||||
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Net cash provided by (used for) operating activities | 8,528 | (703 | ) | |||||||||||||
Net cash used for operating activities | (2,120 | ) | (812 | ) | ||||||||||||
Investing activities: | ||||||||||||||||
Additions to property, plant and equipment | (3,558 | ) | (5,631 | ) | (3,322 | ) | (1,858 | ) | ||||||||
Proceeds from sale of equipment | 16 | 23 | 9 | 14 | ||||||||||||
Increase in other assets | (67 | ) | (80 | ) | (8 | ) | (104 | ) | ||||||||
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Net cash used for investing activities | (3,609 | ) | (5,688 | ) | (3,321 | ) | (1,948 | ) | ||||||||
Financing activities: | ||||||||||||||||
Proceeds from issuance of Common Stock | 4,966 | 1,769 | 1,570 | 1,285 | ||||||||||||
Payment of contingent consideration obligations | (172 | ) | (111 | ) | (30 | ) | (94 | ) | ||||||||
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Net cash provided by financing activities | 4,794 | 1,658 | 1,540 | 1,191 | ||||||||||||
Effect of foreign exchange rates on cash | (23 | ) | (12 | ) | (42 | ) | 17 | |||||||||
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Net increase (decrease) in cash and cash equivalents | 9,690 | (4,745 | ) | |||||||||||||
Net decrease in cash and cash equivalents | (3,943 | ) | (1,552 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | 44,230 | 56,170 | 70,557 | 44,230 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 53,920 | $ | 51,425 | $ | 66,614 | $ | 42,678 | ||||||||
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See accompanying notes.
-4-
Condensed Consolidated Statements of Equity
(In thousands)
(Unaudited)
Three Months Ended | Class B Common Stock | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Vicor Corporation Stockholders’ Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||
Balance on December 31, 2018 | $ | 118 | $ | 402 | $ | 193,457 | $ | 129,000 | $ | (394 | ) | $ | (138,927 | ) | $ | 183,656 | $ | 434 | $ | 184,090 | ||||||||||||||||
Sales of Common Stock | 291 | 291 | 291 | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | 773 | 773 | 773 | |||||||||||||||||||||||||||||||||
Issuances of stock through employee stock purchase plan | 1 | 1,278 | 1,279 | 1,279 | ||||||||||||||||||||||||||||||||
Components of comprehensive income, net of tax | ||||||||||||||||||||||||||||||||||||
Net income | 4,286 | 4,286 | 20 | 4,306 | ||||||||||||||||||||||||||||||||
Other comprehensive loss | (42 | ) | (42 | ) | (5 | ) | (47 | ) | ||||||||||||||||||||||||||||
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Total comprehensive income | 4,244 | 15 | 4,259 | |||||||||||||||||||||||||||||||||
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Balance on March 31, 2019 | $ | 118 | $ | 403 | $ | 195,799 | $ | 133,286 | $ | (436 | ) | $ | (138,927 | ) | $ | 190,243 | $ | 449 | $ | 190,692 | ||||||||||||||||
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Three Months Ended | Class B Common Stock | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Vicor Corporation Stockholders’ Equity | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||
Balance on December 31, 2017 | $ | 118 | $ | 401 | $ | 181,395 | $ | 93,605 | $ | (478 | ) | $ | (138,927 | ) | $ | 136,114 | $ | 305 | $ | 136,419 | ||||||||||||||||
Sales of Common Stock | 358 | 358 | 358 | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | 736 | 736 | 736 | |||||||||||||||||||||||||||||||||
Issuances of stock through employee stock purchase plan | 1 | 926 | 927 | 927 | ||||||||||||||||||||||||||||||||
Cumulative effect of adoption of new accounting principle (Topic 606) | 3,670 | 3,670 | 3,670 | |||||||||||||||||||||||||||||||||
Components of comprehensive income, net of tax | ||||||||||||||||||||||||||||||||||||
Net income | 3,943 | 3,943 | 39 | 3,982 | ||||||||||||||||||||||||||||||||
Other comprehensive income | 244 | 244 | 19 | 263 | ||||||||||||||||||||||||||||||||
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Total comprehensive income | 4,187 | 58 | 4,245 | |||||||||||||||||||||||||||||||||
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Balance on March 31, 2018 | $ | 118 | $ | 402 | $ | 183,415 | $ | 101,218 | $ | (234 | ) | $ | (138,927 | ) | $ | 145,992 | $ | 363 | $ | 146,355 | ||||||||||||||||
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-5-
Notes to Condensed Consolidated Financial Statements
June 30, 2018March 31, 2019
(unaudited)
1. | Basis of Presentation |
The accompanying unaudited Condensed Consolidated Financial Statements of Vicor Corporation and its consolidated subsidiaries (collectively, the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2018March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2018.2019. The balance sheet at December 31, 20172018 presented herein has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form10-K for the year ended December 31, 20172018 filed by the Company with the Securities and Exchange Commission on March 9, February 28, 2019 (“2018 (“2017 Form10-K”).
2. | Recently Adopted Accounting Standard |
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”)FASB issued new guidance for revenue recognition (“Topic 606”),lease accounting, which requires an entitylessees to recognize leases on the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.balance sheet and disclose key information about leasing arrangements. The new guidance which includes several amendments, replaces mostestablishes aright-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with a term longer than twelve months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the prior revenue recognitionincome statement. For lessors, the guidance under U.S. Generally Accepted Accounting Principles. modifies the classification criteria and accounting for sales-type and direct financing leases.
The Company adopted the new guidancestandard as of January 1, 20182019, using the modified retrospective method,effective date as applied to all contracts.the date of initial application. As a result, financial information has not been updated and the Company has changed its accounting policy for revenue recognition, as detailed below. The most significant impact of the adoption was on the timing of recognition of sales to the Company’s stocking distributors and including the additionaldisclosures required disclosures under the new standard. Through December 31, 2017,standard have not been provided for dates and periods before January 1, 2019. The Company elected the ‘package of practical expedients’, which permits companies to not reassess under the new standard lease identification, lease classification and initial direct costs. The Company deferred revenue anddid not elect the related cost of sales on shipmentsuse-of-hindsight or the practical expedient pertaining to stocking distributors untilland easements, the distributors resold the products to their customers. Uponlatter not being applicable.
The adoption the Company is no longer permitted to defer revenue until sale by the stocking distributor to the end customer, but rather, is required to estimate the effects of returns and allowances provided to stocking distributors and record revenue at the time of sale to the stocking distributor. In addition, the Company modified the accounting for a contractual arrangement due to a reassessment of the number of performance obligationsstandard resulted in the arrangement,recognition of ROU assets and adjusted for the timinglease liabilities of certain royalty revenue. Theapproximately $4,329,000 and $4,455,000, respectively, as of January 1, 2019. There was no cumulative effect of adopting this new guidance, recorded as an increase toand the balance of retained earnings as of January 1, 2018, was approximately $3,670,000. The comparative information for the three and six months ended December 31, 2017, including disclosures, hasstandard did not been restated and continues to be reported under the accounting standards in effect for that period.
-5-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The following tables summarize the impacts of adopting the new revenue recognition guidancehave a material impact on certain components of the Company’s condensed consolidated financial statements as of and for the three and six months ended June 30, 2018 (in thousands):
As reported | Adjustments | Balances without adoption of Topic 606 | ||||||||||
Accounts receivable, net | $ | 45,056 | $ | (39 | ) | $ | 45,017 | |||||
Inventories, net | 41,753 | (97 | ) | 41,656 | ||||||||
Total assets | 190,843 | (136 | ) | 190,707 | ||||||||
Income taxes payable | 526 | (18 | ) | 508 | ||||||||
Deferred revenue | 4,610 | 4,445 | 9,055 | |||||||||
Sales allowances | 550 | (466 | ) | 84 | ||||||||
Total liabilities | 31,905 | 3,961 | 35,866 | |||||||||
Retained earnings | 109,078 | (4,097 | ) | 104,981 | ||||||||
Total equity | 158,938 | (4,097 | ) | 154,841 | ||||||||
Total liabilities and equity | 190,843 | (136 | ) | 190,707 |
-6-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
Three Months Ended | ||||||||||||
As reported | Adjustments | Balances without adoption of Topic 606 | ||||||||||
Net revenues | $ | 74,196 | $ | (597 | ) | $ | 73,599 | |||||
Cost of revenues | 38,313 | (372 | ) | 37,941 | ||||||||
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| |||||||
Gross margin | 35,883 | (225 | ) | 35,658 | ||||||||
Income before income taxes | 8,272 | (225 | ) | 8,047 | ||||||||
Provision for income taxes | 363 | (11 | ) | 352 | ||||||||
Consolidated net income | 7,909 | (214 | ) | 7,695 | ||||||||
Net income attributable to Vicor Corporation | 7,860 | (214 | ) | 7,646 | ||||||||
Six Months Ended | ||||||||||||
As reported | Adjustments | Balances without adoption of Topic 606 | ||||||||||
Net revenues | $ | 139,465 | $ | (1,401 | ) | $ | 138,064 | |||||
Cost of revenues | 73,371 | (956 | ) | 72,415 | ||||||||
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Gross margin | 66,094 | (445 | ) | 65,649 | ||||||||
Income before income taxes | 12,388 | (445 | ) | 11,943 | ||||||||
Provision for income taxes | 497 | (18 | ) | 479 | ||||||||
Consolidated net income | 11,891 | (427 | ) | 11,464 | ||||||||
Net income attributable to Vicor Corporation | 11,803 | (427 | ) | 11,376 |
The impact of the adoption of the new revenue recognition standard on the unaudited consolidated statements of comprehensive income (loss) andoperations or cash flows for the three and six months ended June 30, 2018 was not material.
3.Revenue Recognition
Prior to January 1, 2018
Product revenue was recognized in the period when persuasive evidence of an arrangement with a customer existed, the products were shipped and title was transferred to the customer, the price was fixed or determinable, and collection was considered probable.
The Company deferred revenue and the related cost of sales on shipments to stocking distributors until the distributors resold the products to their customers. The agreements with these stocking distributors allowed them to receive price adjustment credits or to return qualifying products for credit, as determined by the Company, in order to reduce the amounts of slow-moving, discontinued, or obsolete product from their inventory. These stocking distributors were also granted price adjustment credits in the event of a price decrease subsequent to the date the product was shipped and invoiced to the stocking distributor. Given the uncertainties associated with the levels of price adjustment credits to be granted to stocking distributors, the sales price to the stocking distributor was not fixed or determinable until the stocking distributor resold the products to its customers. Therefore,
-7-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
the Company deferred revenue and the related cost of sales on shipments to stocking distributors until the stocking distributors resold the products to their customers. Accordingly, the Company’s revenue fully reflectedend-customer purchases and was not impacted by stocking distributor inventory levels. Agreements with stocking distributors limited returns of qualifying product to the Company to a certain percentage of the value of the Company’s shipments to that stocking distributor during the prior quarter. In addition, stocking distributors were allowed to return unsold products if the Company terminated the relationship with the stocking distributor. Title to the inventory transferred to the stocking distributor at the time of shipment or delivery to the stocking distributor. Payment from the stocking distributors were due in accordance with the Company’s standard payment terms. These payment terms were not contingent upon the stocking distributors’ sale of the products to theirend-customers. Upon title transfer to stocking distributors, the Company reduced inventory for the cost of goods shipped, the margin (i.e., revenues less cost of revenues) was recorded as deferred revenue, and an account receivable was recorded. As of DecemberMarch 31, 2017, the Company had gross deferred revenue of approximately $4,659,000 and gross deferred cost of revenues of approximately $2,135,000 under agreements with stocking distributors.2019.
The Company evaluated revenue arrangements with potential multi-element deliverables to determine if there were more than one unit of accounting. A deliverable constituted a separate unit of accounting when it had standalone value and there were no customer-negotiated refund or return rights for the undelivered elements. The Company entered into arrangements containing multiple elements that could include a combination ofnon-recurring engineering services (“NRE”), prototype units, and production units. The Company determined NRE and prototype units represented one unit of accounting and production units represented a separate unit of accounting, based on an assessment of the respective standalone value. The Company deferred revenue recognition for NRE and prototype units until completion of the final milestone under the NRE arrangement, which was generally the delivery of the prototype. Recognition generally took place within six to twelve months of the initiation of the arrangement. Revenue for the production units was recognized upon shipment, consistent with other product revenue summarized above.
License fees were recognized as earned. The Company recognized revenue on such arrangements only when the contract was signed, the license term had begun, all obligations had been delivered to the customer, and collection was probable.
Subsequent to January 1, 2018
Revenue is recognized when control of the promised goods or services is transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales, value add, and other taxes collected concurrent with revenue-producing activities are excluded from revenue. The expected costs associated with product warranties continue to be recognized at the time product revenue is recognized. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenues.
The Company’s primary source of net revenue comes from the sale of products, which are modular power components and power systems for converting, regulating and controlling electric current. The principal customers for the Company’s power converters and systems are large original equipment manufacturers and the original design manufacturers and contract manufacturers serving them, and smaller, lower volume users, which are broadly distributed across several major market areas. The Company recognizes revenue for product sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery, depending on the terms of the underlying contract. As noted above, the Company previously deferred revenue and the related cost of revenues on shipments to stocking distributors until the distributors resold the products to their customers. The Company now records revenue for such transactions at the time of sale to the stocking distributor. The Company establishes sales allowances for estimated future product returns including distributor returns and price adjustment credits, primarily based upon historical and anticipated rates of product returns and allowances.
Certain contracts with customers contain multiple performance obligations, which typically may include a combination of NRE, prototype units, and production units. For these contracts, the individual performance obligations are accounted for separately if they are distinct. Generally, the Company has determined the NRE and prototype units represent one distinct performance obligation and the production units represent a separate distinct performance obligation. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price, based on prices charged to customers or using the expected cost plus a margin approach. The Company defers revenue recognition for NRE and prototype
-8-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
units until the point in time at which the final milestone under the NRE arrangement is completed and control is transferred to the customer, which is generally the delivery of the prototype. Revenue for production units is recognized upon shipment or delivery, consistent with product revenue summarized above.
The Company licenses its intellectual property under right to use licenses, in which royalties due to the Company are based upon a percentage of the licensee’s sales. The Company utilizes the exception under the revenue recognition guidance for the recognition of sales- or usage-based royalties, in which the royalties are not recognized until the later of when 1) the customer’s subsequent sales or usages occur, or 2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied or partially satisfied.
Accounts receivable includes amounts billed and currently due from customers. The amounts due are stated at their estimated realizable value. The Company’s payment terms vary by the type and location of its customers and the products or services offered, although terms generally include a requirement of payment within 30 to 60 days. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, based on assessments of customers’ credit-risk profiles and payment histories. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company does not require collateral from its customers, although there have been circumstances when the Company has required cash in advance (i.e., a partial down-payment) to facilitate orders in excess of a customer’s established credit limit. To date, such amounts have not been material.
The Company records deferred revenue, which represents a contract liability, when cash payments are received or due in advance of performance under a contract with a customer. During the three and six months ended June 30, 2018, under Topic 606, the Company recognized revenue of approximately $340,000 and $385,000, respectively, that was included in deferred revenue at the beginning of each respective period.
The Company applies the practical expedient allowed under the new guidance for the incremental costs of obtaining a contract for sales commissions, which are expensed when incurred because the amortization period is generally less than one year. These costs are included in selling, general and administrative expenses.
The Company also applies another practical expedient allowed under the new guidance and does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
-9-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The following tables present the Company’s net revenues disaggregated by geography based on the location of the customer, by reportable segment, for the three and six months ended June 30, 2018 (in thousands):
Three Months Ended | ||||||||||||||||
BBU | VI Chip | Picor | Total | |||||||||||||
United States | $ | 18,295 | $ | 7,771 | $ | 353 | $ | 26,419 | ||||||||
Europe | 4,877 | 1,169 | 106 | 6,152 | ||||||||||||
Asia Pacific | 23,876 | 10,905 | 5,482 | 40,263 | ||||||||||||
All other | 1,301 | 45 | 16 | 1,362 | ||||||||||||
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$ | 48,349 | $ | 19,890 | $ | 5,957 | $ | 74,196 | |||||||||
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Six Months Ended | ||||||||||||||||
BBU | VI Chip | Picor | Total | |||||||||||||
United States | $ | 35,286 | $ | 15,770 | $ | 986 | $ | 52,042 | ||||||||
Europe | 9,602 | 1,742 | 181 | 11,525 | ||||||||||||
Asia Pacific | 42,087 | 22,292 | 9,240 | 73,619 | ||||||||||||
All other | 2,011 | 225 | 43 | 2,279 | ||||||||||||
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$ | 88,986 | $ | 40,029 | $ | 10,450 | $ | 139,465 | |||||||||
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-10-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The following tables present the Company’s net revenues disaggregated by the category of revenue, by reportable segment, for the three and six months ended June 30, 2018 (in thousands):
Three Months Ended | ||||||||||||||||
BBU | VI Chip | Picor | Total | |||||||||||||
Direct customers, contract manufacturers andnon-stocking distributors | $ | 43,404 | $ | 17,628 | $ | 5,502 | $ | 66,534 | ||||||||
Stocking distributors, net of sales allowances | 4,735 | 1,865 | 343 | 6,943 | ||||||||||||
Non-recurring engineering | 197 | 375 | 90 | 662 | ||||||||||||
Royalties | 13 | 13 | 13 | 39 | ||||||||||||
Other | — | 9 | 9 | 18 | ||||||||||||
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$ | 48,349 | $ | 19,890 | $ | 5,957 | $ | 74,196 | |||||||||
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Six Months Ended | ||||||||||||||||
BBU | VI Chip | Picor | Total | |||||||||||||
Direct customers, contract manufacturers andnon-stocking distributors | $ | 78,878 | $ | 34,934 | $ | 9,482 | $ | 123,294 | ||||||||
Stocking distributors, net of sales allowances | 9,698 | 4,419 | 732 | 14,849 | ||||||||||||
Non-recurring engineering | 372 | 620 | 180 | 1,172 | ||||||||||||
Royalties | 38 | 38 | 38 | 114 | ||||||||||||
Other | — | 18 | 18 | 36 | ||||||||||||
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$ | 88,986 | $ | 40,029 | $ | 10,450 | $ | 139,465 | |||||||||
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The following table presents the changes in certain contract assets and (liabilities) (in thousands):
June 30, 2018 | December 31, 2017 | Increase (decrease) | ||||||||||
Accounts receivable | $ | 45,056 | $ | 34,487 | $ | 10,569 | ||||||
Deferred revenue | (2,652 | ) | (5,015 | ) | 2,363 | |||||||
Deferred expenses | 776 | 377 | 399 | |||||||||
Customer prepayments | (1,958 | ) | (776 | ) | (1,182 | ) | ||||||
Sales allowances | (550 | ) | — | (550 | ) |
-11-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The increase in accounts receivable was primarily due to an increase in net revenues of approximately $15,425,000 in the second quarter of 2018 compared to the fourth quarter of 2017. The decrease in deferred revenue was primarily due to the adoption of the new revenue recognition guidance, as the balances related to stocking distributors were reversed as part of the transition adjustment recorded as of January 1, 2018 (see Note 2 to the Condensed Consolidated Financial Statements). The increase in deferred expenses is primarily due to additional work incurred on certain NRE projects during the second quarter of 2018 for which the associated revenue is being deferred. The increase in sales allowances was due to the establishment of new allowances, in connection with the new revenue recognition guidance, for potential returns and price adjustment credits on sales to stocking distributors.
Deferred expenses are included in Other current assets, and customer prepayments are included in Deferred revenue, in the accompanying Condensed Consolidated Balance Sheets, respectively.
4.Long-Term Investments
As of June 30, 2018 and December 31, 2017, the Company held one auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”) since February 2008. The Failed Auction Security held by the Company is Aaa/AA+ rated by major credit rating agencies, is collateralized by student loans, and is guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program. Management is not aware of any reason to believe the issuer of the Failed Auction Security is presently at risk of default. Through June 30, 2018, the Company has continued to receive interest payments on the Failed Auction Security in accordance with the terms of its indenture. Management believes the Company ultimately should be able to liquidate the Failed Auction Security without significant loss primarily due to the overall quality of the issue held and the collateral securing the substantial majority of the underlying obligation. However, current conditions in the auction rate securities market have led management to conclude the recovery period for the Failed Auction Security exceeds 12 months. As a result, the Company continued to classify the Failed Auction Security as long-term as of June 30, 2018.
The following is a summary ofavailable-for-sale securities (in thousands):
June 30, 2018 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Failed Auction Security | $ | 3,000 | $ | — | $ | 419 | $ | 2,581 | ||||||||
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December 31, 2017 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Failed Auction Security | $ | 3,000 | $ | — | $ | 475 | $ | 2,525 | ||||||||
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As of June 30, 2018, the Failed Auction Security had been in an unrealized loss position for greater than 12 months.
-12-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
The amortized cost and estimated fair value of the Failed Auction Security on June 30, 2018, by contractual maturity, is shown below (in thousands):
Estimated | ||||||||
Cost | Fair Value | |||||||
Due in twenty to forty years | $ | 3,000 | $ | 2,581 | ||||
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Based on the fair value measurements described in Note 5, the fair value of the Failed Auction Security on June 30, 2018, with a par value of $3,000,000, was estimated by the Company to be approximately $2,581,000. The gross unrealized loss of $419,000 on the Failed Auction Security consists of two types of estimated loss: an aggregate credit loss of $44,000 and an aggregate temporary impairment of $375,000. In determining the amount of credit loss, the Company compared the present value of cash flows expected to be collected to the amortized cost basis of the security, considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors (See Note 5).
The following table represents a rollforward of the activity related to the credit loss recognized in earnings on the Failed Auction Security for the six months ended June 30 (in thousands):
2018 | 2017 | |||||||
Balance at the beginning of the period | $ | 48 | $ | 59 | ||||
Reductions in the amount related to credit gain for which other-than- temporary impairment was not previously recognized | (4 | ) | (6 | ) | ||||
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Balance at the end of the period | $ | 44 | $ | 53 | ||||
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At this time, the Company has no intent to sell the impaired Failed Auction Security and does not believe it is more likely than not the Company will be required to sell this security. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit rating of the security deteriorates, the Company may be required to adjust the carrying value of the investment through impairment charges recorded in the Condensed Consolidated Statements of Operations, and any such impairment adjustments may be material.
Based on the Company’s ability to access cash and cash equivalents and its expected operating cash flows, management does not anticipate the current lack of liquidity associated with the Failed Auction Security held will affect the Company’s ability to execute its current operating plan.
5.Fair Value Measurements
The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements.
-13-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
Assets and liabilities measured at fair value on a recurring basis included the following as of June 30, 2018 (in thousands):
Using | ||||||||||||||||
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value as of June 30, 2018 | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 9,501 | $ | — | $ | — | $ | 9,501 | ||||||||
Long-term investments: | ||||||||||||||||
Failed Auction Security | — | — | 2,581 | 2,581 | ||||||||||||
Liabilities: | ||||||||||||||||
Contingent consideration obligations | — | — | (506 | ) | (506 | ) | ||||||||||
Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2017 (in thousands): |
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Using | ||||||||||||||||
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value as of December 31, 2017 | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 9,279 | $ | — | $ | — | $ | 9,279 | ||||||||
Long-term investments: | ||||||||||||||||
Failed Auction Security | — | — | 2,525 | 2,525 | ||||||||||||
Liabilities: | ||||||||||||||||
Contingent consideration obligations | — | — | (678 | ) | (678 | ) |
As of June 30, 2018, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Company’s investment in the Failed Auction Security was deemed to require valuation using Level 3 inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of this security as of June 30, 2018. The major assumptions used in preparing the DCF model were similar to those described in Note 5 - Fair Value Measurements in the Notes to the Consolidated Financial Statements contained in the Company’s 2017 Form10-K.
-14-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
Quantitative information about Level 3 fair value measurements as of June 30, 2018 is as follows (dollars in thousands):
Fair Value | Valuation Technique | Unobservable Input | Weighted Average | |||||||||
Failed Auction Security | $ | 2,581 | Discounted cash flow | Cumulative probability of earning the maximum rate until maturity | 0.06 | % | ||||||
Cumulative probability of principal return prior to maturity | 94.36 | % | ||||||||||
Cumulative probability of default | 5.58 | % | ||||||||||
Liquidity risk premium | 5.00 | % | ||||||||||
Recovery rate in default | 40.00 | % |
The change in the estimated fair value calculated for the investment valued on a recurring basis utilizing Level 3 inputs (i.e., the Failed Auction Security) for the six months ended June 30, 2018 was as follows (in thousands):
Balance at the beginning of the period | $ | 2,525 | ||
Credit gain onavailable-for-sale securities included in Other income (expense), net | 4 | |||
Gain included in Other comprehensive income | 52 | |||
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Balance at the end of the period | $ | 2,581 | ||
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The Company has classified its contingent consideration obligations as Level 3 because the fair value for these liabilities was determined using unobservable inputs. The liabilities were based on estimated sales of legacy products over the period of royalty payments at the royalty rate, discounted using the Company’s estimated cost of capital.
The change in the estimated fair value calculated for the liabilities valued on a recurring basis utilizing Level 3 inputs (i.e., the Contingent consideration obligations) for the six months ended June 30, 2018 was as follows (in thousands):
Balance at the beginning of the period | $ | 678 | ||
Payments | (172 | ) | ||
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Balance at the end of the period | $ | 506 | ||
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There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2018.
-15-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
6.Stock-Based Compensation
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards and options granted under the Vicor Corporation 2017 Employee Stock Purchase Plan (“ESPP”) as of their grant date. Stock-based compensation expense, net for the three and six months ended June 30 was as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Cost of revenues | $ | 59 | $ | 38 | $ | 115 | $ | 72 | ||||||||
Selling, general and administrative | 957 | 215 | 1,499 | 395 | ||||||||||||
Research and development | 164 | 34 | 302 | 74 | ||||||||||||
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Total stock-based compensation | $ | 1,180 | $ | 287 | $ | 1,916 | $ | 541 | ||||||||
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The overall increase in stock-based compensation between the 2018 and 2017 periods was due to an increase in stock options granted between July 1, 2017 and June 30, 2018. The increase in selling, general and administrative stock-based compensation for the three and six months ended June 30, 2018, compared to the same periods in 2017, was also due to increased expense for certain Vicor stock options held by anon-employee. The fair value of these stock options, and related stock-based compensation, are adjusted monthly based on changes in the assumptions under the Black-Scholes option pricing model, including the price of the Company’s common stock, in accordance with the accounting for stock options granted tonon-employees.
Compensation expense by type of award for the three and six months ended June 30 was as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Stock options | $ | 1,005 | $ | 287 | $ | 1,598 | $ | 541 | ||||||||
ESPP | 175 | — | 318 | — | ||||||||||||
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Total stock-based compensation | $ | 1,180 | $ | 287 | $ | 1,916 | $ | 541 | ||||||||
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-16-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
7.Net Income (Loss) per Share
The following table sets forth the computation of basic and diluted net income (loss) per share for the three and six months ended June 30 (in thousands, except per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) attributable to Vicor Corporation | $ | 7,860 | $ | (459 | ) | $ | 11,803 | $ | (1,433 | ) | ||||||
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Denominator: | ||||||||||||||||
Denominator for basic net income (loss) per share-weighted average shares (1) | 39,709 | 39,172 | 39,594 | 39,121 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Employee stock options (2) | 937 | — | 812 | — | ||||||||||||
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Denominator for diluted net income (loss) per share – adjusted weighted-average shares and assumed conversions | 40,646 | 39,172 | 40,406 | 39,121 | ||||||||||||
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Basic net income (loss) per share | $ | 0.20 | $ | (0.01 | ) | $ | 0.30 | $ | (0.04 | ) | ||||||
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Diluted net income (loss) per share | $ | 0.19 | $ | (0.01 | ) | $ | 0.29 | $ | (0.04 | ) | ||||||
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8.Inventories
Inventories are valued at the lower of cost (determined using thefirst-in,first-out method) or net realizable value. Fixed production overhead is allocated to the inventory cost per unit based on the normal capacity of the production facilities. Abnormal production costs, including fixed cost variances from normal production capacity, if any, are charged to cost of revenues in the period incurred. All shipping and handling costs incurred in connection with the sale of products are included in cost of revenues.
The Company provides reserves for inventories estimated to be excess, obsolete or unmarketable. The Company’s estimation process for assessing net realizable value is based upon its known backlog, projected future demand, historical consumption and expected market conditions. If the Company’s estimated demand and/or market expectation were to change or if product sales were to decline, the Company’s estimation process may cause larger inventory reserves to be recorded, resulting in larger charges to cost of revenues.
-17--6-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018March 31, 2019
(unaudited)
Inventories were as follows (in thousands):
June 30, 2018 | December 31, 2017 | March 31, 2019 | December 31, 2018 | |||||||||||||
Raw materials | $ | 32,854 | $ | 27,400 | $ | 37,205 | $ | 37,696 | ||||||||
Work-in-process | 3,513 | 3,596 | 6,386 | 4,740 | ||||||||||||
Finished goods | 5,386 | 5,503 | 7,998 | 4,934 | ||||||||||||
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Net balance | $ | 41,753 | $ | 36,499 | $ | 51,589 | $ | 47,370 | ||||||||
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9.
4. | Long-Term Investments |
As of March 31, 2019 and December 31, 2018, the Company held one auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”) since February 2008. The Failed Auction Security held by the Company is Aaa/AA+ rated by major credit rating agencies, is collateralized by student loans, and is guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program. Management is not aware of any reason to believe the issuer of the Failed Auction Security is presently at risk of default. Through March 31, 2019, the Company has continued to receive interest payments on the Failed Auction Security in accordance with the terms of its indenture. Management believes the Company ultimately should be able to liquidate the Failed Auction Security without significant loss primarily due to the overall quality of the issue held and the collateral securing the substantial majority of the underlying obligation. However, current conditions in the auction rate securities market have led management to conclude the recovery period for the Failed Auction Security exceeds 12 months. As a result, the Company continued to classify the Failed Auction Security as long-term as of March 31, 2019.
The following is a summary ofavailable-for-sale securities (in thousands):
March 31, 2019 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Failed Auction Security | $ | 3,000 | $ | — | $ | 454 | $ | 2,546 | ||||||||
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December 31, 2018 | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||
Failed Auction Security | $ | 3,000 | $ | — | $ | 474 | $ | 2,526 | ||||||||
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As of March 31, 2019, the Failed Auction Security had been in an unrealized loss position for greater than 12 months.
-7-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
The cost and estimated fair value of the Failed Auction Security on March 31, 2019, by contractual maturity, are shown below (in thousands):
Cost | Estimated Fair Value | |||||||
Due in twenty to forty years | $ | 3,000 | $ | 2,546 | ||||
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Based on the fair value measurements described in Note 5, the fair value of the Failed Auction Security on March 31, 2019, with a par value of $3,000,000, was estimated by the Company to be approximately $2,546,000. The gross unrealized loss of $454,000 on the Failed Auction Security consists of two types of estimated loss: an aggregate credit loss of $40,000 and an aggregate temporary impairment of $414,000. In determining the amount of credit loss, the Company compared the present value of cash flows expected to be collected to the amortized cost basis of the security, considering credit default risk probabilities and changes in credit ratings as significant inputs, among other factors (See Note 5).
The following table represents a rollforward of the activity related to the credit loss recognized in earnings on the Failed Auction Security for the three months ended March 31 (in thousands):
2019 | 2018 | |||||||
Balance at the beginning of the period | $ | 41 | $ | 48 | ||||
Reductions in the amount related to credit gain for which other-than-temporary impairment was not previously recognized | (1 | ) | (2 | ) | ||||
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Balance at the end of the period | $ | 40 | $ | 46 | ||||
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At this time, the Company has no intent to sell the impaired Failed Auction Security and does not believe it is more likely than not the Company will be required to sell this security. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit rating of the security deteriorates, the Company may be required to adjust the carrying value of the investment through impairment charges recorded in the Condensed Consolidated Statements of Operations, and any such impairment adjustments may be material.
Based on the Company’s ability to access cash and cash equivalents and its expected operating cash flows, management does not anticipate the current lack of liquidity associated with the Failed Auction Security held will affect the Company’s ability to execute its current operating plan.
5. | Fair Value Measurements |
The Company accounts for certain financial assets at fair value, defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions market participants would use in pricing an asset or liability. A three-level hierarchy is used to show the extent and level of judgment used to estimate fair value measurements.
-8-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
Assets and liabilities measured at fair value on a recurring basis included the following as of March 31, 2019 (in thousands):
Using | ||||||||||||||||
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value as of March 31, 2019 | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 9,484 | $ | — | $ | — | $ | 9,484 | ||||||||
Long-term investments: | ||||||||||||||||
Failed Auction Security | — | — | 2,546 | 2,546 | ||||||||||||
Liabilities: | ||||||||||||||||
Contingent consideration obligations | — | — | (378 | ) | (378 | ) |
Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2018 (in thousands):
Using | ||||||||||||||||
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value as of December 31, 2018 | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 9,433 | $ | — | $ | — | $ | 9,433 | ||||||||
Long-term investments: | ||||||||||||||||
Failed Auction Security | — | — | 2,526 | 2,526 | ||||||||||||
Liabilities: | ||||||||||||||||
Contingent consideration obligations | — | — | (408 | ) | (408 | ) |
As of March 31, 2019, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Security using Level 1 or Level 2 inputs. As such, the Company’s investment in the Failed Auction Security was deemed to require valuation using Level 3 inputs. Management, after consulting with advisors, valued the Failed Auction Security using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of this security as of March 31, 2019. The major assumptions used in preparing the DCF model were similar to those described in Note 5 - Fair Value Measurements in the Notes to the Consolidated Financial Statements contained in the Company’s 2018Form 10-K.
-9-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
Quantitative information about Level 3 fair value measurements as of March 31, 2019 is as follows (dollars in thousands):
Fair Value | Valuation Technique | Unobservable Input | Weighted Average | |||||||||
Failed Auction Security | $ | 2,546 | Discounted cash flow | Cumulative probability of earning the maximum rate until maturity | 0.08 | % | ||||||
Cumulative probability of principal return prior to maturity | 94.01 | % | ||||||||||
Cumulative probability of default | 5.91 | % | ||||||||||
Liquidity risk premium | 5.00 | % | ||||||||||
Recovery rate in default | 40.00 | % |
The change in the estimated fair value calculated for the investment valued on a recurring basis utilizing Level 3 inputs (i.e., the Failed Auction Security) for the three months ended March 31, 2019 was as follows (in thousands):
Balance at the beginning of the period | $ | 2,526 | ||
Credit gain onavailable-for-sale securities included in Other income (expense), net | 1 | |||
Gain included in Other comprehensive income | 19 | |||
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Balance at the end of the period | $ | 2,546 | ||
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The Company has classified its contingent consideration obligations as Level 3 because the fair value for these liabilities was determined using unobservable inputs. The liabilities were based on estimated sales of legacy products over the period of royalty payments at the royalty rate, discounted using the Company’s estimated cost of capital.
The change in the estimated fair value calculated for the liabilities valued on a recurring basis utilizing Level 3 inputs (i.e., the Contingent consideration obligations) for the three months ended March 31, 2019 was as follows (in thousands):
Balance at the beginning of the period | $ | 408 | ||
Payments | (30 | ) | ||
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Balance at the end of the period | $ | 378 | ||
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There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2019.
6. | Product Warranties |
The Company generally offers atwo-year warranty for all of its products, though it has extended the warranty period to three years for certain military grade products sold after January 1, 2017. The Company is party to a limited number of supply agreements with certain customers contractually committing the Company to warranty and indemnification requirements exceeding those to which the Company has been exposed in the past. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors influencing the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty returns, and the cost per return. The Company periodically assesses the adequacy of warranty reserves and adjusts the amounts as necessary. Warranty obligations are included in “Accrued expenses” in the accompanying Condensed Consolidated Balance Sheets.
Product warranty activity for the three and six months ended June 30 was as follows (in thousands):
-10-
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Balance at the beginning of the period | $ | 346 | $ | 185 | $ | 290 | $ | 214 | ||||||||
Accruals for warranties for products sold in the period | 10 | 91 | 133 | 195 | ||||||||||||
Fulfillment of warranty obligations | (20 | ) | (24 | ) | (77 | ) | (97 | ) | ||||||||
Revisions of estimated obligations | (10 | ) | (8 | ) | (20 | ) | (68 | ) | ||||||||
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Balance at the end of the period | $ | 326 | $ | 244 | $ | 326 | $ | 244 | ||||||||
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10.Severance Charge
In May 2018, the Company’s management authorized the closure of its Granite Power Technologies, Inc. (“GPT”) subsidiary, of the Brick Business Unit (“BBU”) segment, by the end of 2018. GPT, located in Manchester, N.H., is one of three Vicor Custom Power (“VCP”) entities. Certain of GPT’s products will continue to be manufactured and sold by the two remaining VCP entities. As a result, the Company recorded apre-tax charge of $350,000 in the second quarter of 2018, for the cost of severance and other employee-related costs involving cash payments based on each employee’s respective length of service. This was recorded as “Severance charge” in the Condensed Consolidated Statement of Operations. The related liability is presented as “Accrued severance charge” in the Condensed Consolidated Balance Sheets.
-18-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018March 31, 2019
(unaudited)
11.Product warranty activity was as follows (in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Balance at the beginning of the period | $ | 268 | $ | 290 | ||||
Accruals for warranties for products sold in the period | 29 | 123 | ||||||
Fulfillment of warranty obligations | (66 | ) | (57 | ) | ||||
Revisions of estimated obligations | — | (10 | ) | |||||
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Balance at the end of the period | $ | 231 | $ | 346 | ||||
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7. | Revenues |
The following tables present the Company’s net revenues disaggregated by geography based on the location of the customer, by reportable segment (in thousands):
Three Months Ended March 31, 2019 | ||||||||||||||||
BBU | VI Chip | Picor | Total | |||||||||||||
United States | $ | 22,292 | $ | 6,237 | $ | 712 | $ | 29,241 | ||||||||
Europe | 6,009 | 923 | 63 | 6,995 | ||||||||||||
Asia Pacific | 17,111 | 9,158 | 1,742 | 28,011 | ||||||||||||
All other | 1,213 | 248 | 17 | 1,478 | ||||||||||||
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$ | 46,625 | $ | 16,566 | $ | 2,534 | $ | 65,725 | |||||||||
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Three Months Ended March 31, 2018 | ||||||||||||||||
BBU | VI Chip | Picor | Total | |||||||||||||
United States | $ | 16,991 | $ | 7,999 | $ | 633 | $ | 25,623 | ||||||||
Europe | 4,725 | 573 | 75 | 5,373 | ||||||||||||
Asia Pacific | 18,211 | 11,387 | 3,758 | 33,356 | ||||||||||||
All other | 710 | 180 | 27 | 917 | ||||||||||||
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$ | 40,637 | $ | 20,139 | $ | 4,493 | $ | 65,269 | |||||||||
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-11-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
The following tables present the Company’s net revenues disaggregated by the category of revenue, by reportable segment (in thousands):
Three Months Ended March 31, 2019 | ||||||||||||||||
BBU | VI Chip | Picor | Total | |||||||||||||
Direct customers, contract manufacturers andnon-stocking distributors | $ | 39,948 | $ | 12,803 | $ | 1,963 | $ | 54,714 | ||||||||
Stocking distributors, net of sales allowances | 6,117 | 2,617 | 549 | 9,283 | ||||||||||||
Non-recurring engineering | 548 | 1,125 | — | 1,673 | ||||||||||||
Royalties | 12 | 12 | 12 | 36 | ||||||||||||
Other | — | 9 | 10 | 19 | ||||||||||||
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$ | 46,625 | $ | 16,566 | $ | 2,534 | $ | 65,725 | |||||||||
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Three Months Ended March 31, 2018 | ||||||||||||||||
BBU | VI Chip | Picor | Total | |||||||||||||
Direct customers, contract manufacturers andnon-stocking distributors | $ | 35,474 | $ | 17,306 | $ | 3,980 | $ | 56,760 | ||||||||
Stocking distributors, net of sales allowances | 4,963 | 2,554 | 389 | 7,906 | ||||||||||||
Non-recurring engineering | 175 | 245 | 90 | 510 | ||||||||||||
Royalties | 25 | 25 | 25 | 75 | ||||||||||||
Other | — | 9 | 9 | 18 | ||||||||||||
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$ | 40,637 | $ | 20,139 | $ | 4,493 | $ | 65,269 | |||||||||
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The following table presents the changes in certain contract assets and (liabilities) (in thousands):
March 31, 2019 | December 31, 2018 | Decrease | ||||||||||
Accounts receivable | $ | 41,705 | $ | 43,673 | $ | (1,968 | ) | |||||
Deferred revenue | (3,909 | ) | (3,820 | ) | (89 | ) | ||||||
Deferred expenses | — | 501 | (501 | ) | ||||||||
Customer prepayments | (1,545 | ) | (1,250 | ) | (295 | ) | ||||||
Sales allowances | (617 | ) | (548 | ) | (69 | ) |
The decrease in accounts receivable was primarily due to a decrease in net revenues in the first quarter of 2019 compared to the fourth quarter of 2018.
-12-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
Deferred expenses are included in Other current assets, and customer prepayments are included in Deferred revenue, in the accompanying Condensed Consolidated Balance Sheets, respectively.
8. | Stock-Based Compensation |
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards, whether they possess time-based vesting provisions or performance-based vesting provisions, and awards granted under the Vicor Corporation 2017 Employee Stock Purchase Plan (“ESPP”), as of their grant date. Stock-based compensation expense was as follows (in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cost of revenues | $ | 69 | $ | 56 | ||||
Selling, general and administrative | 519 | 542 | ||||||
Research and development | 185 | 138 | ||||||
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Total stock-based compensation | $ | 773 | $ | 736 | ||||
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Compensation expense by type of award was as follows (in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Stock options | $ | 533 | $ | 593 | ||||
ESPP | 240 | 143 | ||||||
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Total stock-based compensation | $ | 773 | $ | 736 | ||||
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9. | Leases |
All of the Company’s leases are classified as operating leases. The majority of the Company’s leases are for office and manufacturing space, along with several automobiles and certain equipment. Leases with initial terms of less than twelve months are not recorded on the balance sheet. Expense for these leases is recognized on a straight-line basis over the lease term. The Company’s leases have remaining terms of less than one year to just over six years. The majority of the Company’s leases do not have options to renew, although several have renewal terms to extend the lease for one five-year term, and one lease contains two five-year renewal options. None of the renewal options are included in determining the term of the lease, used for calculating the associated lease liabilities. None of the Company’s leases include variable payments, residual value guarantees or restrictive covenants. A number of the Company’s leases for office and manufacturing space include provision for common area maintenance (“CAM”). The Company accounts for CAM separately from lease payments, and therefore costs for CAM are not included in the determination of lease liabilities. The Company is a party to one arrangement as the lessor, for its former Westcor facility located in Sunnyvale, California, with a third party. The lessee under this lease has one option to renew the lease for a term of five years.
-13-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
As of March 31, 2019, the balance of ROU assets was approximately $4,306,000, and the balances of current and long-term lease liabilities were approximately $1,678,000 and $2,747,000, respectively. For the three months ended March 31, 2019, the Company recorded operating lease cost, including short-term lease cost, of approximately $457,000. The ROU assets are included in “Property, plant and equipment, net” in the accompanying Condensed Consolidated Balance Sheets.
The maturities of the Company’s lease liabilities are as follows (in thousands):
2019 | $ | 1,370 | ||
2020 | 1,448 | |||
2021 | 744 | |||
2022 | 439 | |||
2023 | 349 | |||
Thereafter | 411 | |||
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Total lease payments | $ | 4,761 | ||
Less: Imputed interest | 336 | |||
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Present value of lease liabilities | $ | 4,425 | ||
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As of March 31, 2019, the weighted-average remaining lease term was 3.6 years and the weighted-average discount rate was 3.82% for the Company’s operating leases. The Company developed the discount rates used based on a London Interbank Offered Rate (“LIBOR”) over a term approximating the term of the related lease, plus an additional interest factor, which was generally 1.375%.
For the three months ended March 31, 2019, the Company paid approximately $21,000 for amounts included in the measurement of lease liabilities through operating cash flows, and obtained approximately $406,000 in ROU assets in exchange for new operating lease liabilities.
The maturities of the lease payments to be received by the Company under its leased facility in California are as follows (in thousands):
2019 | $ | 639 | ||
2020 | 874 | |||
2021 | 901 | |||
2022 | 928 | |||
2023 | 955 | |||
Thereafter | 402 | |||
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Total lease payments to be received | $ | 4,699 | ||
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For the three months ended March 31, 2019, the Company recorded lease income under this lease of approximately $214,000.
-14-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
10. | Income Taxes |
The tax provision is based on the estimated annual effective tax rate for the year, which includes estimated federal, state and foreign income taxes on the Company’s projectedpre-tax income (loss).income.
The provision for income taxes and the effective income tax rates for the three and six months ended June 30 were as follows (dollars in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||||||
Provision for income taxes | $ | 363 | $ | 267 | $ | 497 | $ | 168 | $ | 426 | $ | 134 | ||||||||||||
Effective income tax rate | 4.4 | % | 150.0 | % | 4.0 | % | 13.6 | % | 9.0 | % | 3.3 | % |
The effective tax rate wasrates were lower than the statutory tax rate inrates for the first quarter of 2019 and the first quarter of 2018 due primarily to the utilization of net operating loss carryforwards and tax credits. The provisions for income taxes in each 2017 period were primarily due tothe first quarter of 2019 and the first quarter of 2018 also included estimated foreign income taxes and for estimated state taxes in jurisdictions in which the Company does not have net operating loss carryforwards. No tax benefit could be recognized for the majority of the Company’s losses during these periods due to a full valuation allowance against all net domestic deferred tax assets. The provision and effective income tax rate were higher in the second quarter of 2017 as the Company had previously recorded a tax benefit in the first quarter of 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) elimination of the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (3) changing rules related to the usage and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017; and (4) implementing a territorial tax system, which generally eliminates the U.S. federal income tax on dividends from foreign subsidiaries, and imposesa one-time transition tax on certain earnings of foreign subsidiaries previously untaxed in the United States.
Certain impacts of the Tax Act would generally require accounting to be completed in the period of enactment. However, in response to the complexities of the Tax Act, the Securities and Exchange Commission (“SEC”) issued guidance through Staff Accounting Bulletin No. 118 to provide companies with relief. Specifically, when the initial accounting for items under the Tax Act is incomplete, the guidance allows companies to include provisional amounts when reasonable estimates can be made. The SEC has provided up toa one-year measurement period for companies to finalize the accounting for the impact of the new legislation and the Company expects to finalize the accounting over the coming quarters. The Company has recognized the provisional tax impacts related tothe re-measurement of its deferred tax assets and liabilities,and one-time transition tax, for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. There were no changes to the provisional tax impacts referred to above in the first or second quarters of 2018.
-19-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
As of June 30, 2018,March 31, 2019, the Company continues to maintainhas a valuation allowance of approximately $33,024,000$30,031,000 against all domestic net deferred tax assets.assets, for which realization cannot be considered more likely than not at this time. Management assesses the need for the valuation allowance on a quarterly basis. In assessing the need for a valuation allowance, the Company considers all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and past financial performance. Due to improving financial results, there is increasingWhile recent positive evidence to support realization of deferred tax assets. Until actual operating results continuecaused the Company to be consistently positive, andin a cumulative income position as of March 31, 2019, it has been in such a position for only a limited number of quarters. In addition, some uncertainty in economic conditions that could potentially impact the Company believes it is more likely than not it can forecast sufficient future taxable income of the appropriate naturehas led management to realize thoseconclude a full valuation allowance against all domestic net deferred tax assets it will continue to maintain the fullis still warranted as of March 31, 2019. The valuation allowance position.against these deferred tax assets may require adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance. If the positive quarterly earnings continue, the Company may release all or a portion of the valuation in the near-term. If and when the Company determines the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit reported in that period’s consolidated statementsConsolidated Statements of operations,Operations, the effect of which would be an increase in reported net income.
In May 2017,
-15-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
11. | Net Income per Share |
The following table sets forth the Company received notice from the Internal Revenue Service that its federal corporate tax return for tax year 2015 had been selected for examination. The examination was completed in May 2018 resulting in no tax liability to the Company. In January 2018, the Company received notice from the New York State Departmentcomputation of Taxation that its New York State tax returns for tax years 2014 through 2016 were selected for audit. Onsite fieldwork for this audit was completed in May 2018,basic and the Company is awaiting the results of the audit.diluted net income per share (in thousands, except per share amounts):
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net income attributable to Vicor Corporation | $ | 4,286 | $ | 3,943 | ||||
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Denominator: | ||||||||
Denominator for basic net income per share-weighted average shares (1) | 40,229 | 39,479 | ||||||
Effect of dilutive securities: | ||||||||
Employee stock options (2) | 800 | 688 | ||||||
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Denominator for diluted net income per share – adjusted weighted-average shares and assumed conversions | 41,029 | 40,167 | ||||||
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Basic net income per share | $ | 0.11 | $ | 0.10 | ||||
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Diluted net income per share | $ | 0.10 | $ | 0.10 | ||||
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(1) | Denominator represents weighted average number of shares of Common Stock and Class B Common Stock outstanding. |
(2) | Options to purchase 134,535 and 82,241 shares of Common Stock for the three months ended March 31, 2019 and 2018, respectively, were not included in the calculation of net income per share as the effect would have been antidilutive. |
12. | Commitments and Contingencies |
At June 30, 2018,March 31, 2019, the Company had approximately $2,044,000$4,393,000 of capital expenditure commitments.
The Company is the defendant in a patent infringement lawsuit originally filed on January 28, 2011 by SynQor, Inc. (“SynQor”) in the U.S. District Court for the Eastern District of Texas (the “Texas Action”). The complaint, as amended in September 2011, alleges that the Company’s products, including but not limited to, unregulated bus converters used in intermediate bus architecture power supply systems, infringe SynQor’s U.S. patent numbers 7,072,190, 7,272,021, 7,564,702, and 8,023,290 (“the ‘190 patent”, “the ‘021 patent”, “the ‘702 patent”, and “the ‘290 patent”, respectively). SynQor’s complaint sought an injunction against further infringement and an award of unspecified compensatory and enhanced damages, interest, costs and attorney fees. The Company has denied that its products infringe any of the SynQor patents, asserted that the SynQor patents are invalid, and asserted that the ‘290 patent is unenforceable due to inequitable conduct by SynQor or its agents during the examination of the ‘290 patent at the United States Patent and Trademark Office (“USPTO”). The Company also asserted counterclaims seeking damages against SynQor for deceptive trade practices and tortious interference with prospective economic advantage arising from SynQor’s attempted enforcement of its patents against the Company. On May 23, 2016, after extensive discovery, the Texas Action was stayed by the court pending completion of certain inter partes reexamination proceedings at the USPTO (including any appeals from such proceedings to the
-16-
VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
Federal Circuit (as defined below)) concerning the SynQor patents, which are described below. On November 2, 2018, SynQor filed a motion to lift the stay of the Texas Action. On January 3, 2019, the magistrate judge issued an order denying the motion and reaffirming the Court’s original decision that the stay should remain at least until the conclusion of all pending inter partes reexaminations and related appeals. On January 17, 2019, SynQor filed objections to the magistrate judge’s order, and sought reconsideration of that order by the district court judge. The district court judge has not yet ruled on SynQor’s objections.
In 2011, in response to the filing of the Texas Action, the Company initiated inter partes reexamination proceedings at the USPTO challenging the validity of certain claims of the SynQor patents asserted in the Texas Action, including all claims that were asserted against the Company by SynQor. The current status of these proceedings is as follows.
Regarding the ‘190 patent, the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) issued a decision on March 13, 2015, determining that certain claims were invalid, and remanding the matter to the Patent Trial and Appeal Board (“PTAB”) of the USPTO for further proceedings. On May 2, 2016, the PTAB issued a decision determining thataffirming the examiner’s original rejection of all but one of the remaining claims of the ‘190 patent, were invalid and remandingidentifying a new basis for rejecting the remaining claim (“claim 34”), which had been added by SynQor during the reexamination. SynQor then requested further examination of claim 34 by the examiner, pursuant to a patent examiner for further examination.37 C.F.R. § 41.77(b)(1). On June 22, 2017, the examiner issued a determination under 37 C.F.R. § 41.77(d), finding that the remaining claim of the ‘190 patent34 was unpatentable. That decision is expected to be further reviewedwas affirmed by the PTAB pursuanton February 20, 2019. SynQor subsequently appealed that decision to 37 C.F.R. § 41.77(f). the Federal Circuit and that appeal is currently pending.
On May 2, 2016, the PTAB also issued decisions finding all challenged claims of SynQor’s ‘021 patent invalid and upholding the validity of all challenged claims of SynQor’s ‘702 and ‘290 patents.
On August 30, 2017, the Federal Circuit issued rulings with regard to PTAB’s reexamination decisions for the ‘021, ‘702 and ‘290 patents.those decisions. With respect to the ‘021 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘021 patent were invalid. The Federal Circuit remanded the case to the PTAB for further consideration of the patentability of certain claims that had been added by amendment during the reexamination. On February 20, 2019, the PTAB issued a decision affirming the examiner’s rejections of all challenged claims. With respect to the ‘702 patent, the Federal Circuit affirmed the PTAB’s determination that all of the challenged claims of the ‘702 patent were patentable. With respect to the ‘290 patent, the Federal Circuit vacated the PTAB’s decision upholding the patentability of the ‘290 patent claims, and remanded the case to the PTAB for further consideration.
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VICOR CORPORATION
Notes On February 20, 2019, the PTAB issued a decision reversing its prior affirmance of the examiner’snon-adoption of rejections with respect to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
the ‘290 patent, and entering rejections of all of the claims of the ‘290 patent. SynQor may now choose to reopen prosecution of this proceeding, or to appeal the PTAB’s decision to the Federal Circuit.
On October 31, 2017, the Company filed a request with the USPTO for ex parte reexamination of the asserted claims of the ‘702 patent, based on different prior art references than had been at issue in the previous inter partepartes reexamination of the ‘702 patent. On December 6, 2017, the USPTO issued a decision granting the Company’s request and initiating ex parte reexamination of the ‘702 patent.patent after finding that the Company’s request had raised a substantial new question of patentability of the challenged claims. On March 21, 2018, the USPTOexaminer issued anon-final office action finding all of the challenged claims of the ‘702 patent to be unpatentable. On May 14, 2018, SynQor filed a petition askingrequesting the USPTO to vacate its prior decision granting the Company’s request for ex parte reexamination. No action has been taken on the petition to date. On September 12, 2018, the examiner issued a final office action finding all of the challenged claims of the ‘702 patent to be unpatentable. On October 26, 2018, SynQor filed a notice of appeal appealing the examiner’s final rejection to the PTAB. On December 3, 2018, the USPTO denied SynQor’s petition to vacate the decision initiating the ex parte reexamination. On January 25, 2019, SynQor appealed the Examiner’s final rejection to the PTAB. That appeal is pending. The Company continues to monitor the progress of this proceeding.
On August 6, 2018, the Company filed a request with the USPTO for ex parte reexamination of the asserted claims of the ‘190 patent, based on different prior art references than had been at issue in the previous inter partes reexamination of the ‘190 patent. On September 11, 2018, SynQor filed a petition asking the USPTO to reject the Company’s request on the ground that it presented substantially the same prior art or arguments presented to the USPTO in the prior inter partes reexamination of the ‘190 patent. On December 3, 2018, the USPTO denied SynQor’s petition to reject the Company’s ex parte reexamination request. On December 4, 2018, the USPTO instituted ex parte reexamination of the ‘190 patent after finding that the Company’s request had raised a substantial new question affecting the patentability of the challenged claims. On March 15, 2019, the USPTO issued anon-final rejection of all of the asserted claims of the ‘190 patent.
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VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
On January 23, 2018, the20-year terms of the ‘190 patent, the ‘021 patent and the ‘702 patent expired. The20-year term of the ‘290 patent expired on July 16, 2018. As a consequence of these expirations, the Company cannot be liable under any of the SynQor patents for allegedly infringing activities occurring after the patents’ respective expiration dates. In addition, any amended claims that may issue as a result of any of the still-pending reexamination proceedings will have no effective term and cannot be the basis for any liability by the Company.
The Company continues to believe none of its products, including its unregulated bus converters, infringe any valid claim of the asserted SynQor patents, either alone or when used in an intermediate bus architecture implementation. The Company believes SynQor’s claims lack merit and, therefore, it continues to vigorously defend itself against SynQor’s patent infringement allegations. The Company does not believe a loss is probable for this matter. If a loss were to be incurred, however, the Company cannot estimate the amount of possible loss or range of possible loss at this time.
In addition to the SynQor matter, the Company is involved in certain other litigation and claims incidental to the conduct of its business. While the outcome of lawsuits and claims against the Company cannot be predicted with certainty, management does not expect any current litigation or claims will have a material adverse impact on the Company’s financial position or results of operations.
13. | Segment Information |
In 2018, Picor Merger
On May 25, 2018, the Company’s Board of Directors unanimously approved the mergerCorporation, a consolidated subsidiary of the Company, was merged with and into the Company, and its operations and personnel were reassigned. Although the legal structure of Picor Corporation (“Picor”), a subsidiary of Vicor, fully consolidated for financial reporting purposes, in which the Company was the majority stockholder. The merger was completed as of May 30, 2018, at which time the separate corporate existence of Picor ceased. To effect the merger, holders of Picor Common Stock and Picor stock options received an equivalent value of Vicor Common Stock and Vicor stock options, respectively, which caused the Picor Corporation Amended and Restated 2001 Stock Option and Incentive Plan, and options outstanding thereunder, to be assumed and restated by Vicor. While Picor’s subsidiary status and corporate formhas ceased to exist, upon the closing ofCompany continues to report its operating segments as the merger, the operations previously conducted byBrick Business Unit, VI Chip, and Picor, which are now legally merged into Vicor, continue to be managedreflecting its historical organizational segmentation and remain categorized as a segment for financial reporting purposes. There was no net impact on the Company’s consolidated financial statements nor any impact on the Company’s segment reporting for the three and six months ended June 30, 2018 as a result of the merger.management’s operational oversight.
14.Segment Information
The Company has organized its business segments according to its key product lines. The BBU segment designs, develops, manufactures, and markets the Company’s legacy lines ofmodularDC-DC converters and configurable products, and also includes the entities comprising Vicor Custom Power and the BBU operations of Vicor Japan Company, Ltd. (“VJCL”). The VI Chip segment includes VI Chip Corporation, which designs, develops, manufactures, and markets many of the Company’s advanced power component products. The VI Chip segment also includes the VI Chip business conducted in Japan through VJCL. The Picor segment, which consists of the operations of the Company’s former subsidiary, Picor Corporation (see Note 13, above), designs, develops, manufactures, and markets integrated circuits for use in a variety of power management and power system applications. The Picor segment develops integrated circuits for use in the Company’s BBU and VI Chip modules, to be sold as complements to the Company’s BBU and VI Chip products, or for sale to third parties for separate (i.e., stand-alone) applications.
The Company’s Chief Executive Officer (i.e., identified as the chief“chief operating decision maker)maker”) (“CODM”), pursuant to U.S. GAAP, evaluates performance and allocates resources based on segment revenues and segment operating income (loss). The operating income (loss) for each segment includes selling, general, and administrative and research and development expenses directly attributable to the segment. Certain of the Company’s indirect overhead costs, which include corporate selling, general, and administrative expenses, are allocated among the segments based upon an estimate of costs associated with each segment. Assets allocated to each segment are based upon specific
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VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2018
(unaudited)
identification of such assets, which include accounts receivable, inventories, fixed assets, and certain other assets. The Corporate segment consists of those operations and assets shared by all operating segments. The costs of certain centralized executive and administrative functions are recorded in this segment, as are certain shared assets, most notably cash and cash equivalents, deferred tax assets, long-term investments, the Company’s facilities in Massachusetts, real estate, and other assets. The Company’s accounting policies and method of presentation for segments are consistent with that used throughout the Condensed Consolidated Financial Statements.
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VICOR CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(unaudited)
The following table provides significant segment financial data as of and for the three months ended June 30March 31 (in thousands):
BBU | VI Chip | Picor | Corporate | Eliminations (1) | Total | |||||||||||||||||||||||||||||||||||||||||||
2019: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 47,673 | $ | 18,429 | $ | 3,272 | $ | — | $ | (3,649 | ) | $ | 65,725 | |||||||||||||||||||||||||||||||||||
Income (loss) from operations | 6,055 | 100 | (1,310 | ) | (352 | ) | — | 4,493 | ||||||||||||||||||||||||||||||||||||||||
Total assets | 287,891 | 50,975 | 15,614 | 84,259 | (213,735 | ) | 225,004 | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 885 | 1,011 | 193 | 356 | — | 2,445 | ||||||||||||||||||||||||||||||||||||||||||
Capital Expenditures | 1,175 | 1,809 | 338 | — | — | 3,322 | ||||||||||||||||||||||||||||||||||||||||||
BBU | VI Chip | Picor | Corporate | Eliminations (1) | Total | |||||||||||||||||||||||||||||||||||||||||||
2018: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 48,349 | $ | 20,719 | $ | 9,175 | $ | — | $ | (4,047 | ) | $ | 74,196 | $ | 40,637 | $ | 20,881 | $ | 8,221 | $ | — | $ | (4,470 | ) | $ | 65,269 | ||||||||||||||||||||||
Income (loss) from operations | 5,227 | 1,284 | 2,436 | (631 | ) | — | 8,316 | 1,039 | 1,081 | 2,022 | (456 | ) | — | 3,686 | ||||||||||||||||||||||||||||||||||
Total assets | 265,952 | 40,845 | 12,756 | 69,889 | (198,599 | ) | 190,843 | 239,619 | 40,206 | 12,662 | 58,095 | (176,952 | ) | 173,630 | ||||||||||||||||||||||||||||||||||
Depreciation and amortization | 882 | 836 | 196 | 356 | — | 2,270 | 912 | 811 | 191 | 355 | — | 2,269 | ||||||||||||||||||||||||||||||||||||
2017: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 39,077 | $ | 15,168 | $ | 6,335 | $ | — | $ | (2,871 | ) | $ | 57,709 | |||||||||||||||||||||||||||||||||||
Income (loss) from operations | 2,535 | (3,889 | ) | 1,098 | (282 | ) | — | (538 | ) | |||||||||||||||||||||||||||||||||||||||
Total assets | 219,195 | 27,621 | 11,287 | 67,764 | (162,252 | ) | 163,615 | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 1,000 | 659 | 190 | 340 | — | 2,189 | ||||||||||||||||||||||||||||||||||||||||||
The following table provides segment financial data as of and for the six months ended June 30 (in thousands): |
| |||||||||||||||||||||||||||||||||||||||||||||||
BBU | VI Chip | Picor | Corporate | Eliminations (1) | Total | |||||||||||||||||||||||||||||||||||||||||||
2018: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 88,986 | $ | 41,600 | $ | 17,396 | $ | — | $ | (8,517 | ) | $ | 139,465 | |||||||||||||||||||||||||||||||||||
Income (loss) from operations | 6,266 | 2,365 | 4,458 | (1,087 | ) | — | 12,002 | |||||||||||||||||||||||||||||||||||||||||
Total assets | 265,952 | 40,845 | 12,756 | 69,889 | (198,599 | ) | 190,843 | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 1,794 | 1,647 | 387 | 711 | — | 4,539 | ||||||||||||||||||||||||||||||||||||||||||
2017: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenues | $ | 76,612 | $ | 28,090 | $ | 13,193 | $ | — | $ | (5,724 | ) | $ | 112,171 | |||||||||||||||||||||||||||||||||||
Income (loss) from operations | 3,955 | (7,809 | ) | 2,466 | (528 | ) | — | (1,916 | ) | |||||||||||||||||||||||||||||||||||||||
Total assets | 219,195 | 27,621 | 11,287 | 67,764 | (162,252 | ) | 163,615 | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 1,973 | 1,288 | 370 | 715 | — | 4,346 | ||||||||||||||||||||||||||||||||||||||||||
Capital Expenditures | 399 | 1,290 | 169 | — | — | 1,858 |
(1) | The elimination for net revenues is principally related to inter-segment sales by Picor to BBU and VI Chip and for inter-segment sales by VI Chip to BBU. The elimination for total assets is principally related to inter-segment accounts receivable due to BBU for the funding of VI Chip and Picor operations. |
Substantially all long-lived assets are located in the United States.
14. |
|
In JuneAugust 2018, the FASBFinancial Accounting Standards Board (“FASB”) issued new guidance which modifies the disclosure requirements on fair value measurements under Topic 820,Fair Value Measurements, Improvements to Nonemployee Share-Based Payment Accounting , which more closely alignsincluding the accounting for share-based payments tonon-employees with the accounting for share-based payments to employees. Thisconsideration of costs and benefits.The new guidance is effective for public businessall entities for annual and interim periods in fiscal years beginning after December 15, 2018. Early2019, with early adoption permitted. It is permitted, but no earlier than an entity’s adoption daterequired to be applied on a retrospective approach with certain elements being adopted prospectively for only the most recent interim or annual period presented in the initial fiscal year of Topic 606.Theadoption. The Company is currently evaluatinghas not yet determined the impact this new guidance will have on its consolidated financial statements.
In May 2017, the FASB issued guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718,Compensation – Stock Compensation. The new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the new standard on January 1, 2018. The adoption of this new guidance did not have a material impact on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued guidance to clarify how certain cash receipts and cash payments should be presented in the statement of cash flows. These include debt prepayment, settlement ofzero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the new standard on January 1, 2018. The adoption of this new guidance did not have a material impact on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued new guidance which will require measurement and recognition of expected credit losses on certain types of financial instruments. It also modifies the impairment model foravailable-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. It is required to be applied on a modified-retrospective approach with certain elements being adopted prospectively. The Company does not expect the adoption of the new guidance will have a material impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued new guidance for lease accounting, which will require lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new guidance establishes aright-of-use model (“ROU”) that will require a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and accounting for sales-type and direct financing leases. The majority of the Company’s leases are for certain of its office and manufacturing space. The Company has developed an implementation plan and continues to gather information, including compiling an inventory of all leasing arrangements, to assess the impact of the new standard on its financial statements. The new standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt the new guidance effective January 1, 2019. The new standard must be adopted using a modified retrospective transition which includes certain practical expedients. The Company has not yet determined the impact this new guidance will have on its consolidated financial statements and related disclosures.
Other new pronouncements issued but not effective until after June 30, 2018March 31, 2019 are not expected to have a material impact on the Company’s consolidated financial statements.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018March 31, 2019
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
ExceptThe Company’s consolidated operating results are affected by a wide variety of factors that could materially and adversely affect revenues and profitability, including the risk factors described in the Company’s Annual Report on Form10-K for statementsthe year ended December 31, 2018. As a result of historical fact contained herein, statementsthese and other factors, the Company may experience material fluctuations in this report constitutefuture operating results on a quarterly or annual basis, which could materially and adversely affect its business, consolidated financial condition, operating results, and the share price of its listed common stock. This document and other documents filed by the Company with the Securities and Exchange Commission (“SEC”) include forward-looking statements withinregarding future events and the meaningCompany’s future results that are subject to the safe harbor afforded under the Private Securities Litigation Reform Act of Section 27A of1995 and other safe harbors afforded under the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “assumes,” “may,” “will,” “would,” “should,” “continue,” “prospective,” “project,” and1934. All statements other similar words or expressions identifythan statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are based on our current beliefs, expectations, estimates, forecasts, and projections for the future performance of the Company. Forward-looking statements are identified by the use of words denoting uncertain, future events, such as “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “future,” “if,” “intend,” “may,” “plan,” “potential,” “project,” “prospective,” “seek,” “should,” “target,” “will,” or “would,” as well as similar words and phrases, including the negatives of these terms, or other variations thereof. Forward-looking statements also include without limitation, statements regardingregarding: our ongoing development of power conversion architectures, switching topologies, materials, packaging, and products; the ongoing transition of the Company’sour business strategically, organizationally, and organizationallyoperationally from serving a large number of relatively low volume customers across diversified markets and geographies to serving a small number of relatively large volume customers, typically concentrated in computing and communications;customers; our intent to enter new market segments; the levellevels of customer orders overall and, in particular, from large customers and the delivery lead times associated therewith; the financial and operational impact of customer changes to shipping schedules; the derivation of a portion of the Company’sour sales in each quarter from orders booked in the same quarter; our intent to expand the Company’s ongoing developmentpercentage of power conversion architectures, switching topologies, packaging technologies, and products; the Company’srevenue associated with licensing our intellectual property to third parties; our plans to invest in expanded manufacturing capacity and the timing, location, and locationfunding thereof; the Company’s continued success depending in part on its ability to attract and retain qualified personnel; the Company’sour belief that cash generated from operations and the total of itsour cash and cash equivalents will be sufficient to fund operations for the foreseeable future; the Company’sour belief that it haswe have limited exposure to currency risks; the Company’sour intentions regarding the declaration and payment of cash dividends; the Company’sour intentions regarding protecting itsour rights under itsour patents; and the Company’sour expectation that no current litigation or claims will have a material adverse impact on itsour financial position or results of operations. These forward-looking statements are based upon the Company’sour current expectations and estimates as to theassociated with prospective events and circumstances whichthat may or may not be within the Company’sour control and as to which there can be no assurance. Actual results could differ materially from those expressed or implied by forward-looking statements as a result of various factors, including the Company’s ability to: grow its revenues, establish and maintain profitability, develop and market new products and technologies cost effectively, and on a timely basis leverage the Company’s new technologies in standard productsbut not limited to promote market acceptance of the Company’s new approach to power system architecture; leverage design wins into increased product sales; continue to meet requirements of key customers and prospects; enter into licensing agreements increasing the Company’s market opportunity and accelerating market penetration; realize significant royalties under such licensing agreements; achieve sustainable bookings rates for the Company’s products across served markets and geographies; improve manufacturing and operating efficiencies; successfully enforce the Company’s intellectual property rights; successfully defend outstanding litigation; hire and retain key personnel; and maintain an effective system of internal controls over financial reporting. These and other factors that may influence actual results arethose described in the risk factors set forth in the Company’s Annual Report on Form10-K for the year ended December 31, 2017,2018 under Part I, Item 1 — “Business,” under Part I, Item 1A — “Risk Factors,” under Part I, Item 3 — “Legal Proceedings,” and under Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The riskdiscussion of our business contained herein, including the identification and assessment of factors contained in the Company’s Annual Report on Form10-K for the year ended December 31, 2017that may influence actual results, may not be exhaustive. Therefore, the information contained thereinpresented should be read together with other reports and documents that the Company fileswe file with the Securities and Exchange CommissionSEC from time to time, including Formsour Annual Reports on Form10-Q,8-K10-K, our Quarterly Reports on Form10-Q and our Current Reports on Form10-K,8-K, which may supplement, modify, supersede, or update those risk factors. Except as required by law, the Company doesfactors discussed in this Quarterly Report on Form10-Q. We do not undertake any obligation to update any forward-looking statements as a result of future events or developments.developments, except as required by law.
Overview
We design, develop, manufacture, and market modular power components and power systems for converting regulating,electrical power for use in electrically-powered devices. Our competitive position is supported by innovations in product design and controlling electric current.achievements in product performance, largely enabled by our focus on the research and development of advanced technologies and processes, often implemented in proprietary semiconductor circuitry, materials, and packaging. Many of our products incorporate patented or proprietary implementations of high-frequency switching topologies enabling power system solutions that are more efficient and much smaller than conventional alternatives. Our strategy emphasizes demonstrable product differentiation and a value proposition based on competitively superior solution performance, advantageous design flexibility, and a compelling total cost of ownership. We also license certain rightsconsider our core competencies to our technology in returnbe associated with 48V distribution, which offers numerous inherent cost and performance advantages over lower distribution voltages, although we offer products addressing other voltage standards (e.g., 28V for recurring royalties. The principal customers for our power convertersdefense electronics applications) and systems are large original equipment manufacturers (“OEMs”) and the original design manufacturers (“ODMs”) and contract manufacturers serving them, and smaller, lower volume users. We serve a broad range of market segments and geographies worldwide.
We have organized our business segments according to our key product lines. Reflecting our history and direction, we broadly categorize our products as either “legacy” or “advanced,” generally based on design, performance, and form factor considerations, as well as the range of applications for which the products are appropriate.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Based on design, performance, and form factor considerations, as well as the range of evolving applications for which our products are appropriate, we categorize our product portfolios as either “Advanced Products” or “Brick Products.” The Advanced Products category consists of our more recently introduced products, which are largely used to implement our proprietary Factorized Power ArchitectureTM (“FPA”), an innovative power distribution architecture enabling flexible, rapid power system design using individual components optimized to perform a specific conversion stage (i.e., function). The Brick Products category largely consists of our broad and well-established families of integrated power converters, incorporating multiple conversion stages, used in conventional distributed power systems architectures.
Given the growth profiles of the markets we serve with Advanced Products and Brick Products, our strategy involves a transition in organizational focus, emphasizing investment in Advanced Products, targeting high growth market segments with alow-mix, high-volume operational model, while maintaining a profitable business in mature market segments we serve with Brick Products with ahigh-mix,low-volume operational model.
For financial reporting purposes, we organize and report our operating segments according to our key product lines. Although our Picor Corporation subsidiary was merged with and into the Company in 2018, we continue to report our operating segments as the Brick Business Unit (“BBU”) operating segment, the VI Chip operating segment, and the Picor operating segment, reflecting our historical organizational segmentation and management’s operational oversight.
The BBU segment designs, develops, manufactures, and markets our legacyBrick Product lines ofDC-DC converters and configurable products, as well as complementary components providing AC line rectification, input filtering, power factor correction, and transient protection. The BBU segment, as reported, also includes the BBU business conducted throughthird-party and intra-segment activities of our Vicor Custom Power and Vicor Japan Company, Ltd. (“VJCL”) and our Vicor Custom Power subsidiaries. The BBU has customers concentrated in aerospace and aviation, defense electronics, industrial automation, industrial equipment, medical diagnostics, rail transportation, and test and measurement instrumentation.
The VI Chip segment consists of our subsidiary, VI Chip Corporation, which designs, develops, manufactures, and markets manya range of innovative products incorporating our advancedlatest advances in switching topologies, materials, and packaging, largely used to implement power component products.system designs. The VI Chip segment, as reported, also includes the VI Chip business conducted in Japan throughthird-party and intra-segment activities, including those of VJCL. VI Chip generally targets large, high volume customers concentrated in the datacenter and supercomputer segments of the computing market, although we also target applications in aerospace and aviation, autonomous driving, defense electronics, electric and hybrid vehicles, instrumentation and test equipment, networking equipment, and solid state lighting.
The Picor segment consists of the operations of our former subsidiary, Picor Corporation, which was legally merged with and into Vicorthe Company in May 2018 (see Note 132018. While Picor Corporation’s subsidiary status and corporate form ceased to exist upon the Condensed Consolidated Financial Statements).closing of the merger, Picor operations remain categorized as an operating segment for financial reporting purposes. The Picor segment designs, develops, and markets integrated circuits for use in a variety of power management and power system applications. The Picor segment is a “fabless manufacturer,” as its products are manufactured, assembled, packaged, and tested by third parties in Asia and the United States. The Picor segment develops integrated circuits for use in our BBU and VI Chip modules,products across the Company, to be sold as complements to our BBU and VI Chipthose products, or for sale to third parties for separate (i.e., stand-alone) applications, and are often integrated with VI Chip segment products to enable a customer solution,FPA implementation, particularly in the datacenter and supercomputer segments of the computing market. WhileAs such, the Picor Corporation’s subsidiary statussegment, as reported, includes inter-segment activities.
Revenue from the sale of Advanced Products represents the sum of third-party sales of our Picor and corporate form ceased to exist uponVI Chip operating segments. Revenue from the closingsale of Brick Products represents the sum of third-party revenue of the merger,Brick Business Unit operating segment, inclusive of such sales of our Vicor Custom Power and VJCL subsidiaries. When reporting such revenue on a consolidated basis, intra-segment and inter-segment revenues are eliminated.
The applications in which our Advanced Products and Brick Products are used are typically in the operations previously legally merged into Picor Corporation, which are now conducted by Vicor, continuehigher-performance, higher-power segments of the market segments we serve. With our Advanced Product lines, we generally serve large Original Equipment Manufacturers (“OEMs”), Original Design Manufacturers (“ODMs”), and their contract manufacturers, with sales currently concentrated within the server, server rack, and datacenter infrastructure segments of the computing market, although we also target customers and applications in aerospace and aviation, defense electronics, industrial automation, instrumentation, test equipment, solid state lighting, telecommunications and networking infrastructure, and vehicles (notably in the autonomous driving applications, electric vehicles, and hybrid electric vehicle niches of the vehicle segment). With our Brick Product lines, we generally serve a fragmented base of large and small customers, concentrated in aerospace and defense electronics, industrial automation, industrial equipment, instrumentation and test equipment, and transportation. With our strategic emphasis on larger, high-volume customers, we expect to be managedexperience over time a greater concentration of sales among relatively fewer customers.
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VICOR CORPORATION
Management’s Discussion and remain categorizedAnalysis of
Financial Condition and Results of Operation
March 31, 2019
Summary of First Quarter 2019 Financial Performance
Our consolidated financial performance for the first quarter of 2019 declined sequentially from the fourth quarter of 2018, as shipments declined, reflecting slowed bookings during the second half of 2018. Total revenue sequentially declined approximately 11%, as shipments of Advanced Products declined sharply, while shipments of Brick Products were steady quarter to quarter. Our gross margin as a segmentpercentage of revenue rose sequentially, to 47.3% from the prior quarter’s 45.9%, largely attributable to improved average selling prices and an improved mix of products shipped, partially offset by higher tariff charges and lower absorption of manufacturing overhead expenses. While operating expenses were steady sequentially, our consolidated operating margin as a percentage of revenue declined to 6.8% from 9.5%, largely because of the sequential decline in revenue. Net income attributable to Vicor Corporation (i.e., after net income or loss attributable to a noncontrolling interest) for financial reporting purposes.the first quarter of 2019 declined sequentially to $4,286,000, representing earnings per share for the first quarter of 2019 of $0.10, in contrast to the corresponding figures of $6,910,000 and $0.17 for the fourth quarter of 2018.
First quarter 2019 bookings increased 10% sequentially over the fourth quarter of 2018, primarily driven by improved orders for Brick Products. Bookings for Advanced Products remained at a level consistent with the fourth quarter of 2018, largely reflecting the limited visibility of a primary customer for near-term demand for that customer’s supercomputing and high performance computing systems, which utilize ourPower-on-Package solutions for Artificial Intelligence (“AI”) applications.
Our improvedquarterly consolidated operating results for the second quartercan be difficult to forecast and have been subject to significant fluctuations. We plan our production and inventory levels based on management’s estimates of 2018 were driven by an increasecustomer demand, based on customer forecasts and other sources. Customer forecasts, particularly those of OEM, ODM, and contract manufacturing customers to which we supply Advanced Products in net revenues,high volumes, are subject to scheduling changes on short notice, contributing to operating inefficiencies and excess costs. In addition, external factors such as global macroeconomic conditions and supply-chain conditions have caused our operating results to vary meaningfully. Our quarterly gross margin as a consequencepercentage of sequential quarterly increases in bookings and order backlog, as well as improved gross margins resulting from higherrevenue may vary, depending on production volumes, favorableaverage selling prices, average unit costs, and the mix of products sold that quarter. Our quarterly operating margin as a percentage of revenue also may vary with changes in revenue and product mix,level profitability, but our operating costs are largely associated with compensation and improved pricing. The sequential increase in quarterly revenue for the period was primarily a result of double-digit percentage increases in the value of shipments of certain legacy and advanced product lines, as well as the start of production shipments of our“Power-on-PackageTM” solution.
Current order booking activity reflects customer interest in our expanding portfolio of highly-differentiated advanced products. Market uptake of our 48 voltrelated employee costs, which are not subject topoint-of-load solutions for datacenters and supercomputers accelerated during the second quarter of 2018, with increased order volumes for ourPRM-VTM andPower-on-Package solutions. We also are receiving increased interest and orders for our ChiP,SM-ChiP, andCM-ChiP modules across a range of applications.Year-to-date bookings for our legacy brick converters, configurable products, and associated components have recovered and are above historical trend, which we attribute primarily to the extended recovery of economic conditions in the geographies and markets we serve, notably in defense electronics, high-value capital goods, and rail. sudden or significant changes.
We believe the following considerations may influence our financial performance over the remainder of 2018:2019:
Operational Considerations
We operate a highly automated electronics manufacturing facility in Andover, Massachusetts, and our profitability is closely aligned with production unit volumes. We have invested significantly instate-of-the-art systems, equipment, and robotics, which allow us to generate relatively higher profitability when operating at or near factory capacity, even with a high mix of products produced. However, periods of low volume production and/or brief, low volume production runs contribute to lower profitability, largely due to lower absorption of relatively high manufacturing overhead costs associated with our manufacturing model. While direct labor and associated variable costs generally correlate with volume, manufacturing overhead costs are inflexible and, therefore, problematic during periods of low volume or brief production runs.
We have investedcontinue to invest in the production capacity to meet our internal volume projections, and believe these projections are reasonable.reasonable and our investment will be adequate. However, if sustained, uniform, high volume production levels are not achieved, notably in Advanced Products, our product-level profitability likely will not reach the levels necessary to cover our fixed spending, consisting of manufacturing overhead costs and operating costs.
Current capital investments are focused on the expansion of manufacturing capacity for the production of Advanced Products at our Andover facility. Based on our long-term forecast of production levels, we anticipate substantial additional capacity will be required to meet requirements beyond 2020. We believe the most appropriate manner of meeting our long-term capacity requirements will be to initially expand the production area of our Andover facility by approximately 85,000 square feet, through the addition of a two story wing. We have entered the design and permitting phase for this project and plan to break ground on this addition to our existing plant in 2019 and take occupancy in 2020. We also are proceeding with the
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
evaluation of alternative projects for the addition of another, larger manufacturing facility, should we anticipate the need based on our forecasts for capacity beyond 2021. Construction activity can be difficult to schedule, and construction sites can present management and operational challenges. As such, given the proximity of the addition to our existing operations, this construction activity has the potential to disrupt our current operations, which could cause production to be delayed and costs to increase. |
Our ability to achieve sustained, high volume production levels is tied to our ability to forecast manufacturing requirements for, and the availability of, a range of inputs, notably raw material inventories. Because we utilize a number of components and other materials of proprietary design, our ability to sustain targeted production schedules and meet customer delivery requirements has been vulnerable to delays or shortages of such inventories, which often cause prices of these components and materials to rise. With the implementation in 2018 of Section 301 Tariffs on certain Chinese goods imported into the United States, we are now exposed to potentially higher costs on certain electronic components and devices we import from China for use in the manufacture of our products. For the first quarter of 2019, costs associated with duties and tariffs exceeded $1,000,000. We continue to assess the impact of these costs and, if the Chinese trade dispute is not resolved in the near-term in a manner that eliminates or substantially reduces such costs, we may add a “tariff surcharge” to the selling price of our products.
To mitigate supply chain risks, we focus on identifying and reducing potential vulnerabilities to stock-outs, vendor shortages, and similar disruptions. We maintain safety-stock programs for certain critical components and materials, and these programs recently have contributed to increased levels of raw material inventory.inventory primarily for Advanced Products. We also have established second-source supply relationships, in order to reduce exposure to material shortages. However,Although the global electronics supply chain continueshas generally stabilized, we continue to experience lengthened lead times for certain product categories, and our product-level profitability and overall performance could be negatively influenced by an unplanned shortage of a particular component or material. We do not expect lead-times to shorten in 2018 and anticipate availability of certain commodity components will remain uncertain.uncertain through 2019.
As revenue has increased, these percentagesour operating expenses have declined as a percentage of revenue, although such expenses have not declined meaningfully on an absolute basis. We have expanded and focused our engineering and sales organizations to pursue the promising opportunities afforded by our innovative advanced products,Advanced Products, and we believe our current level of absolute spending is necessary to achieve our strategic goals. However, many of these opportunities are in early phases of development, and near-term revenue growth may not be sufficient to further reduce the percentages of revenue represented by our operating expenses meaningfully or to levels comparable to our high volume competitors.
Market and Macroeconomic Considerations
Based on current customer activity, an expanding customer list, and an expanding backlog, we believe the 48 volt48V topoint-of-load opportunity has entered an accelerated, second phase of development, with a broadening of interest, notably associated with ourPower-on- Package solution, as well as the entry of new vendors.vendors offering 48V solutions. OurPower-on-Package solution powering graphics processing units (“GPUs”) and application-specific integrated circuits (“ASICs”) used in AI applications has received strong customer interest, and we have secured significant design wins for the solution. We also believe customer interest in the application of 48V distribution to server racks and datacenter infrastructure is accelerating. As such, we likely will face a more complex competitive landscape, with additional challenges.challenges and competitors. We continue to believe our new products will be adopted in volume by multiple leading customers, as the number of OEMs, ODMs, hyperscalers, and cloud services providers with which we are engaged in development activities expanded in the second quarter.2018. However, we cannot control the actions by, or the timing of, our customers, their contract manufacturers, or the significant vendors also participating in the market. Many of these vendors possess resources far greater than we do and have operational and financial flexibility we do not. Notably, our outlook for 2019 bookings and shipments ofPower-on-Package solutions has been influenced by the sudden, fourth quarter 2018 shift in the confidence of our primary customer for those solutions, given reduced visibility of near-term demand for that customer’s supercomputing and high performance computing systems utilizing our solutions. Despite recent and anticipated design wins, as well as the strong momentum of AI computing through 2018, recent customer uncertainty may cause orders from new and existing customers to be delayed, potentially influencing our financial results and capacity expansion plans.
-23-
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2019
We anticipate aggregate demand for the mature markets we serve with our legacy productsBrick Products will grow at most, onlyover the long-term at the rate of the overall industrial economy (i.e., in the United States, for example, at the rate of growth approximating that of the industrial segments of gross domestic product) for the foreseeable future.. Given our long-standing customer relationships and the status of our legacy productsBrick Products in long-livedlong-standing customer applications, we anticipate maintaining our share in many of these mature markets. While we are pursuing opportunities to replace our legacy productsmany Brick Products used in existing customers’ applications with advanced productsAdvanced Products, when appropriate, and, similarly, to replace competitors’ products in existing applications, we believe such opportunities may not cumulatively contribute to expanding, in 2018,2019, our share of the mature markets we serve with our legacy products.Brick Products.
Financial Highlights:Highlights
Revenues for the secondfirst quarter ended March 31, 2019 totaled $65,725,000, a 0.7% increase from $65,269,000 for the corresponding period a year ago, and a 10.8% sequential decrease from $73,720,000 in the fourth quarter of 2018. The sequential decline in quarterly revenue is associated primarily with lower bookings for certain Advanced Products during the fourth quarter of 2018 from $57,709,000and customer postponement of backlog originally scheduled for shipment during the secondfirst quarter of 2017, primarily due to an overall 47.3% increase in bookings in the second quarter of 2018, compared to the second quarter of 2017, with significant increases across all business units. We have recorded sequential increases in total bookings over the past ten quarters.2019.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Gross margin increased to $35,883,000$31,086,000 for the secondfirst quarter of 2018 from $25,930,0002019, compared to $30,211,000 for the secondcorresponding period a year ago, and decreased sequentially from $33,873,000 for the fourth quarter of 2017, and gross2018. Gross margin, as a percentage of net revenues,revenue, increased to 48.4%47.3% for the secondfirst quarter of 2018 from 44.9%2019, compared to 46.3% for the secondcorresponding period a year ago, and increased from 45.9% for the fourth quarter of 2017, both due2018.The sequential improvement in gross margin percentage is attributable largely to the increase in net revenues.improved average selling prices and an improved mix of products shipped, partially offset by higher tariff charges and lower absorption of manufacturing overhead expenses.
Operating expenses for the secondfirst quarter of 2019 increased $68,000, or 0.3%, to $26,593,000 from $26,525,000 for the first quarter of 2018, increased $1,099,000, or 4.2%, to $27,567,000but declined less than one percent from $26,468,000$26,797,000 for the secondfourth quarter of 2017, due to an increase in selling, general, and administrative expenses of $1,278,000, partially offset by a decrease in research and development expense of $529,000. We recorded a severance charge of $350,000 during the second quarter of 2018 in connection with the planned closure of one of our Vicor Custom Power subsidiaries, Granite Power Technologies, Inc. (“GPT”), as part of our ongoing initiative to streamline operations and improve our cost structure.2018.
Depreciation and amortization totaled $4,539,000,$2,445,000, and capital additions totaled $3,558,000,$3,322,000 for the first quarter of 2019, compared to $4,346,000$2,269,000 and $5,631,000,$1,858,000, respectively, for the six months ended June 30, 2017.first quarter of 2018, and $2,384,000 and $11,317,000, respectively, for the fourth quarter of 2018. The sequential decline in quarterly capital additions is associated primarily with the placement in service of a substantial amount of manufacturing equipment during the fourth quarter of 2018.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
March 31, 2019
Inventories, increased by approximately $5,254,000, or 14.4%, to $41,753,000net of reserves, totaled $51,589,000 at June 30, 2018,the end of the first quarter of 2019, compared to $36,499,000$38,959,000 at December 31, 2017. Thisthe end of the first quarter of 2018 and $47,370,000 at the end of the fourth quarter of 2018. The sequential increase in net inventories was primarily associated with increasesa $4,808,000 increase in VI Chipwork-in-progress and BBU inventoriesfinished goods balances associated with rescheduled shipments of $4,127,000certain Advanced Products and $1,625,000, respectively, to meet increased bookings for the two segments,a $1,154,000 decline in reserves, partially offset by a decreasedecline in Picor inventoriesraw materials of $498,000.$1,742,000.
Critical Accounting Policies and Estimates
Please refer to the Company’s Annual Report on Form10-K for the year ended December 31, 20172018 for a summary of the Company’s critical accounting policies and estimates.
See Note 2 to the Condensed Consolidated Financial Statements pertaining to the adoption of the new accounting standard for revenue recognition.lease accounting.
Three months ended March 31, 2019, compared to three months ended March 31, 2018
Consolidated net revenues for the first quarter of 2019 were $65,725,000, an increase of $456,000, or 0.7%, as compared to $65,269,000 for the first quarter of 2018, and a decrease of $7,995,000, or 10.8%, on a sequential basis from $73,720,000 for the fourth quarter of 2018.
Net revenues, by reporting segment, for the first quarter of 2019 and the first quarter of 2018 were as follows (dollars in thousands):
Increase (decrease) | ||||||||||||||||
2019 | 2018 | $ | % | |||||||||||||
BBU | $ | 46,625 | $ | 40,637 | $ | 5,988 | 14.7 | % | ||||||||
VI Chip | 16,566 | 20,139 | (3,573 | ) | (17.7 | )% | ||||||||||
Picor | 2,534 | 4,493 | (1,959 | ) | (43.6 | )% | ||||||||||
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Total | $ | 65,725 | $ | 65,269 | $ | 456 | 0.7 | % | ||||||||
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The increase in BBU segment revenues was primarily attributable to increases in BBU module and configurable product revenues of approximately $4,749,000 and Vicor Custom Power revenues of approximately $1,503,000. Revenues for the VI Chip and Picor segments declined, primarily due to certain orders originally scheduled to ship in the first quarter of 2019 which were rescheduled into the second and third quarters of 2019.
Gross margin for the first quarter of 2019 increased $875,000, or 2.9%, to $31,086,000, from $30,211,000 for the first quarter of 2018. Gross margin as a percentage of net revenues increased to 47.3% for the first quarter of 2019 compared to 46.3% for the first quarter of 2018. Both increases were primarily due to broadly improved average selling prices and an improved mix of products shipped, partially offset by higher tariff charges and lower absorption of manufacturing overhead expenses in the first quarter of 2019.
Selling, general, and administrative expenses were $15,373,000 for the first quarter of 2019, a decrease of $26,000, or 0.2%, from $15,399,000 for the first quarter of 2018. Selling, general, and administrative expenses as a percentage of net revenues decreased to 23.4% for the first quarter of 2019 from 23.6% for the first quarter of 2018.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Three months ended June 30, 2018, compared to three months ended June 30, 2017
Consolidated net revenues for the second quarter of 2018 were $74,196,000, an increase of $16,487,000, or 28.6%, as compared to $57,709,000 for the second quarter of 2017, and an increase of $8,927,000, or 13.7%, on a sequential basis from $65,269,000 for the first quarter of 2018.
Net revenues, by segment, for the second quarter of 2018 and the second quarter of 2017 were as follows (dollars in thousands):
Increase | ||||||||||||||||
2018 | 2017 | $ | % | |||||||||||||
BBU | $ | 48,349 | $ | 39,077 | $ | 9,272 | 23.7 | % | ||||||||
VI Chip | 19,890 | 14,527 | 5,363 | 36.9 | % | |||||||||||
Picor | 5,957 | 4,105 | 1,852 | 45.1 | % | |||||||||||
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Total | $ | 74,196 | $ | 57,709 | $ | 16,487 | 28.6 | % | ||||||||
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The increase in consolidated net revenues for the second quarter of 2018 from the second quarter of 2017 was primarily due to an overall 47.3% increase in bookings in the second quarter of 2018, compared to the second quarter of 2017, with significant increases across all business units. The increase in BBU segment revenues was primarily attributable to an increase in BBU module and configurable product revenues of approximately $8,471,000. Increases in revenues recorded by the VI Chip and Picor segments for the second quarter of 2018 were associated largely with fulfillment of increased orders for our 48 volt topoint-of-load solutions.
Gross margin for the second quarter of 2018 increased $9,953,000, or 38.4%, to $35,883,000, from $25,930,000 for the second quarter of 2017. Gross margin as a percentage of net revenue increased to 48.4% for the second quarter of 2018 compared to 44.9% for the second quarter of 2017. Both increases were primarily due to the increase in net revenues and an improved mix of products shipped.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Selling, general, and administrative expenses were $15,814,000 for the second quarter of 2018, an increase of $1,278,000, or 8.8%, from $14,536,000 for the second quarter of 2017. Selling, general, and administrative expenses as a percentage of net revenues decreased to 21.3% for the second quarter of 2018 from 25.2% for the second quarter of 2017, primarily due to the increase in net revenues.
The components of the $1,278,000 increase in selling, general and administrative expenses for the second quarter of 2018 from the second quarter of 2017 were as follows (dollars in thousands):
Increase (decrease) | ||||||||
Compensation | $ | 1,221 | 13.8 | %(1) | ||||
Legal fees | 163 | 38.8 | %(2) | |||||
Audit, tax, and accounting fees | 144 | 43.2 | %(3) | |||||
Facilities expenses | (89 | ) | (21.9 | )% | ||||
Travel expenses | (113 | ) | (13.1 | )%(4) | ||||
Other, net | (48 | ) | (1.3 | )% | ||||
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$ | 1,278 | 8.8 | % | |||||
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Research and development expenses were $11,403,000$11,220,000 for the secondfirst quarter of 2018, a decrease2019, an increase of $529,000,$94,000, or 4.4%0.8%, compared to $11,932,000$11,126,000 for the secondfirst quarter of 2017.2018. As a percentage of net revenues, research and development expenses decreasedincreased to 15.4%17.1% for the secondfirst quarter of 20182019 from 20.7%17.0% for the secondfirst quarter of 2017, primarily due to the increase in net revenues.
The components of the $529,000 decrease in research and development expenses were as follows (dollars in thousands):
Increase (decrease) | ||||||||
Project andpre-production materials | $ | (1,122 | ) | (43.4 | )%(1) | |||
Compensation | 238 | 3.0 | %(2) | |||||
Supplies expense | 262 | 137.0 | %(3) | |||||
Deferred costs | 264 | 49.9 | %(4) | |||||
Other, net | (171 | ) | (9.2 | )% | ||||
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$ | (529 | ) | (4.4 | )% | ||||
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-30-
VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
In May 2018, the Company’s management authorized the closure of GPT by the end of 2018. GPT is one of three Vicor Custom Power (“VCP”) entities, located in Manchester, N.H. Certain of GPT’s products will continue to be manufactured and sold by the two remaining VCP entities. As a result, we recorded apre-tax charge of $350,000 in the second quarter of 2018, for the cost of severance and other employee-related costs involving cash payments based on each employee’s respective length of service.
The significant components of ‘‘Other income (expense), net’’ for the three months ended June 30,March 31, and the changes between the periods were as follows (in thousands):
2018 | 2017 | Increase (decrease) | 2019 | 2018 | Increase (decrease) | |||||||||||||||||||
Rental income | $ | 198 | $ | 198 | $ | — | $ | 198 | $ | 198 | $ | — | ||||||||||||
Interest income | 83 | 55 | 28 | |||||||||||||||||||||
Foreign currency (losses) gains, net | (312 | ) | 110 | (422 | ) | (58 | ) | 161 | (219 | ) | ||||||||||||||
Interest income | 53 | 23 | 30 | |||||||||||||||||||||
Gain on disposals of equipment | 3 | 21 | (18 | ) | 9 | 14 | (5 | ) | ||||||||||||||||
Credit gains onavailable-for-sale securities | 2 | 3 | (1 | ) | 1 | 2 | (1 | ) | ||||||||||||||||
Other, net | 12 | 5 | 7 | 6 | — | 6 | ||||||||||||||||||
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$ | (44 | ) | $ | 360 | $ | (404 | ) | $ | 239 | $ | 430 | $ | (191 | ) | ||||||||||
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Our exposure to market risk fluctuations in foreign currency exchange rates relates to the operations of VJCL, for which the functional currency is the Japanese Yen, and all other subsidiaries in Europe and Asia, for which the functional currency is the U.S. Dollar. These other subsidiaries in Europe and Asia experienced unfavorable foreign currency exchange rate fluctuations in 20182019 compared to 2017.2018. Interest income increased due to an increase in interest rates.
Income (loss) before income taxes was $8,272,000$4,732,000 for the secondfirst quarter of 2018,2019, as compared to $(178,000)$4,116,000 for the secondfirst quarter of 2017.2018.
The provision for income taxes and the effective income tax rates for the secondfirst quarter of 20182019 and the secondfirst quarter of 20172018 were as follows (dollars in thousands):
2018 | 2017 | 2019 | 2018 | |||||||||||||
Provision for income taxes | $ | 363 | $ | 267 | $ | 426 | $ | 134 | ||||||||
Effective income tax rate | 4.4 | % | 150.0 | % | 9.0 | % | 3.3 | % |
The effective tax rate wasrates were lower than the statutory tax rate inrates for the first quarter of 2019 and the first quarter of 2018 due primarily to the utilization of net operating loss carryforwards and tax credits. The provisionprovisions for income taxes in 2017 was primarily due tothe first quarter of 2019 and the first quarter of 2018 also included estimated foreign income taxes and for estimated state taxes in jurisdictions in which we dothe Company does not have net operating loss carryforwards. No tax benefit could be recognized
See Note 10 to the Condensed Consolidated Financial Statements for the majoritydisclosure regarding our current assessment of our losses during that period due to a fullthe valuation allowance against all domestic net domestic deferred tax assets. The provisionassets, and effective income tax rate were relatively highthe possible release (i.e., reduction) of the allowance in the second quarter of 2017 as we had previously recorded a tax benefit in the first quarter of 2017.future.
Net income per diluted share attributable to Vicor Corporation was $0.19$0.10 for both the secondfirst quarter of 2018 as compared to net loss per share of $(0.01) for2019 and the secondfirst quarter of 2017.2018.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Six months ended June 30, 2018, compared to six months ended June 30, 2017
Consolidated net revenues for the sixmonths ended June 30, 2018 were $139,465,000, an increase of $27,294,000, or 24.3%, from $112,171,000 for the six months ended June 30, 2017.
Net revenues, by segment, for the six months ended June 30, 2018 and the six months ended June 30, 2017 were as follows (dollars in thousands):
Increase | ||||||||||||||||
2018 | 2017 | $ | % | |||||||||||||
BBU | $ | 88,986 | $ | 76,612 | $ | 12,374 | 16.2 | % | ||||||||
VI Chip | 40,029 | 26,951 | 13,078 | 48.5 | % | |||||||||||
Picor | 10,450 | 8,608 | 1,842 | 21.4 | % | |||||||||||
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Total | $ | 139,465 | $ | 112,171 | $ | 27,294 | 24.3 | % | ||||||||
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The overall increase in consolidated net revenues for the six months ended June 30, 2018 from the six months ended June 30, 2017 was primarily due to an overall 44.4% increase in bookings for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, with significant increases across all business units. The increase in BBU segment revenues was primarily attributable to an increase in BBU module and configurable product revenues of approximately $10,553,000, VJCL revenues of approximately $1,363,000 and Vicor Custom Power revenues of $631,000. Increases in revenues recorded by the VI Chip and Picor segments for the six months ended June 30, 2018 were associated largely with fulfillment of increased orders for our 48 volt topoint-of-load solutions.
Gross margin for the six months ended June 30, 2018 increased $16,512,000, or 33.3%, to $66,094,000 from $49,582,000 for the six months ended June 30, 2017, primarily due to the increase in net revenues. Gross margin as a percentage of net revenues increased to 47.4% for the six month period ended June 30, 2018 compared to 44.2% for the six month period ended June 30, 2017. Both increases were primarily due to the increase in net revenues and an improved mix of products shipped.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Selling, general and administrative expenses were $31,213,000 for the six months ended June 30, 2018, an increase of $2,654,000, or 9.3%, compared to $28,559,000 for the six months ended June 30, 2017. Selling, general and administrative expenses as a percentage of net revenues decreased to 22.4% for the six month period ended June 30, 2018 from 25.5% for the six month period ended June 30, 2017, primarily due to the increase in net revenues.
The components of the $2,654,000 increase in selling, general and administrative expenses for the six months ended June 30, 2018 from the six months ended June 30, 2017 were as follows (dollars in thousands):
Increase (decrease) | ||||||||
Compensation | $ | 2,042 | 11.5 | %(1) | ||||
Audit, tax, and accounting fees | 486 | 59.9 | %(2) | |||||
Legal fees | 207 | 27.2 | %(3) | |||||
Computer expenses | 89 | 18.3 | % | |||||
Travel expenses | (78 | ) | (5.3 | )% | ||||
Facilities expenses | (85 | ) | (10.4 | )% | ||||
Commissions expense | (161 | ) | (9.1 | )%(4) | ||||
Other, net | 154 | 3.3 | % | |||||
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$ | 2,654 | 9.3 | % | |||||
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Research and development expenses were $22,529,000 for the six months ended June 30, 2018, a decrease of $410,000, or 1.8%, from $22,939,000 for the six months ended June 30, 2017. As a percentage of net revenues, research and development expenses decreased to 16.2% for the six month period ended June 30, 2018 from 20.5% for the six month period ended June 30, 2017, primarily due to the increase in net revenues.
The components of the $410,000 decrease in research and development expenses for the six months ended June 30, 2018 from the six months ended June 30, 2017 were as follows (dollars in thousands):
Increase (decrease) | ||||||||
Project andpre-production materials | $ | (1,139 | ) | (27.7 | )%(1) | |||
Outside services | 100 | 36.8 | % | |||||
Deferred costs | 246 | 30.7 | %(2) | |||||
Supplies expense | 256 | 61.0 | %(3) | |||||
Compensation | 349 | 2.2 | %(4) | |||||
Other, net | (222 | ) | (6.7 | )% | ||||
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$ | (410 | ) | (1.8 | )% | ||||
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The significant components of ‘‘Other income (expense), net’’ for the six months ended June 30, 2018 and the six months ended June 30, 2017 and the changes from period to period were as follows (in thousands):
2018 | 2017 | Increase (decrease) | ||||||||||
Rental income | $ | 396 | $ | 396 | $ | — | ||||||
Foreign currency (losses) gains, net | (152 | ) | 204 | (356 | ) | |||||||
Interest income | 108 | 47 | 61 | |||||||||
Gain on disposals of equipment | 16 | 23 | (7 | ) | ||||||||
Credit gains onavailable-for-sale securities | 4 | 6 | (2 | ) | ||||||||
Other, net | 14 | 9 | 5 | |||||||||
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$ | 386 | $ | 685 | $ | (299 | ) | ||||||
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Our exposure to market risk fluctuations in foreign currency exchange rates relates to the operations of VJCL, for which the functional currency is the Japanese Yen, and all other subsidiaries in Europe and Asia, for which the functional currency is the U.S. Dollar. These other subsidiaries in Europe and Asia experienced unfavorable foreign currency exchange rate fluctuations in 2018 compared to 2017.
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Income (loss) before income taxes was $12,388,000 for the six months ended June 30, 2018, as compared to $(1,231,000) for the six months ended June 30, 2017.
The provision for income taxes and the effective income tax rates for the six months ended June 30, 2018 and the six months ended June 30, 2017 were as follows (dollars in thousands):
2018 | 2017 | |||||||
Provision for income taxes | $ | 497 | $ | 168 | ||||
Effective income tax rate | 4.0 | % | 13.6 | % |
The effective tax rate was lower than the statutory tax rate in 2018 due to the utilization of net operating carryforwards and tax credits. The provision for income taxes in 2017 was primarily due to estimated foreign income taxes and for estimated state taxes in jurisdictions in which we do not have net operating loss carryforwards. No tax benefit could be recognized for the majority of our losses during the periods due to a full valuation allowance against all net domestic deferred tax assets.
Net income per diluted share attributable to Vicor Corporation was $0.29 for the six months ended June 30, 2018, compared to net loss per share of $(0.04) for the six months ended June 30, 2017.
Liquidity and Capital Resources
As of June 30, 2018,March 31, 2019, we had $53,920,000$66,614,000 in cash and cash equivalents. The ratio of total current assets to total current liabilities was 4.7:5.3:1 as of June 30, 2018March 31, 2019 and 4.2:4.6:1 as of December 31, 2017.2018. Working capital, defined as total current assets less total current liabilities, increased $23,196,000$3,993,000 to $113,992,000$133,055,000 as of June 30, 2018March 31, 2019 from $90,796,000$129,062,000 as of December 31, 2017.2018.
The changes in working capital from December 31, 20172018 to June 30, 2018March 31, 2019 were as follows (in thousands):
Increase (decrease) | ||||
Cash and cash equivalents | $ | 9,690 | ||
Accounts receivable | 10,569 | |||
Inventories, net | 5,254 | |||
Other current assets | 486 | |||
Accounts payable | (2,154 | ) | ||
Accrued compensation and benefits | (1,158 | ) | ||
Accrued expenses | 454 | |||
Sales allowances | (550 | ) | ||
Accrued severance charge | (350 | ) | ||
Income taxes payable | (226 | ) | ||
Deferred revenue | 1,181 | |||
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$ | 23,196 | |||
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VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operation
June 30, 2018
Increase (decrease) | ||||
Cash and cash equivalents | $ | (3,943 | ) | |
Accounts receivable | (1,968 | ) | ||
Inventories, net | 4,219 | |||
Other current assets | 420 | |||
Accounts payable | 4,972 | |||
Accrued compensation and benefits | 1,247 | |||
Accrued expenses | 465 | |||
Operating lease liabilities | (1,678 | ) | ||
Sales allowances | (69 | ) | ||
Accrued severance charge | 185 | |||
Income taxes payable | 528 | |||
Deferred revenue | (385 | ) | ||
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$ | 3,993 | |||
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The primary sourcesuses of cash for the sixthree months ended June 30, 2018March 31, 2019 were fromfor purchase of equipment of $3,322,000 and operating activities of $8,528,000 and$2,120,000. The primary source of cash for the three months ended March 31, 2019 from proceeds was from the issuance of Common Stock upon the exercise of options under our stock option plans and the saleour 2017 Employee Stock Purchase Plan, of shares of our Common Stock under our ESPP, of $4,966,000. The primary use of cash for the six months ended June 30, 2018 was for purchase of equipment of $3,558,000.$1,570,000.
In November 2000, our Board of Directors authorized the repurchase of up to $30,000,000 of our Common Stock (the “November 2000 Plan”). The November 2000 Plan authorizes us to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing and amounts of Common Stock repurchases are at the discretion of management based on its view of economic and financial market conditions. We did not repurchase shares of Common Stock under the November 2000 Plan during the sixthree months ended June 30, 2018.March 31, 2019. As of June 30, 2018,March 31, 2019, we had approximately $8,541,000 remaining under the November 2000 Plan.
We had approximately $4,393,000 of capital expenditure commitments, principally for manufacturing equipment, as of March 31, 2019, which we intend to fund with existing cash. Our primary liquidity needs are for making continuing investments in manufacturing equipment.equipment and, if we proceed with the planned construction of 85,000 square feet of additional manufacturing space adjoining our existing Andover manufacturing facility, for funding architectural and construction costs. We believe cash generated from operations and the total of our cash and cash equivalents will be sufficient to fund planned operations andoperational needs, capital equipment purchases, and the planned construction, for the foreseeable future. We had approximately $2,044,000 of capital expenditure commitments, principally for manufacturing equipment, as of June 30, 2018.
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June 30, 2018March 31, 2019
Item 3 — Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including changes in interest rates affecting the return on our cash and cash equivalents and fluctuations in foreign currency exchange rates. As our cash and cash equivalents consist principally of cash accounts and money market securities, which are short-term in nature, we believe our exposure to market risk on interest rate fluctuations for these investments is not significant. As of June 30, 2018,March 31, 2019, our long-term investment portfolio, recorded on our Condensed Consolidated Balance Sheet as “Long-term investments, net”, consisted of a single auction rate security with a par value of $3,000,000, purchased through and held in custody by a broker-dealer affiliate of Bank of America, N.A., that has experienced failed auctions (the “Failed Auction Security”) since February 2008. While the Failed Auction Security is Aaa/AA+ rated by major credit rating agencies, collateralized by student loans and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program, continued failure to sell at its periodic auction dates (i.e., reset dates) could negatively impact the carrying value of the investment, in turn leading to impairment charges in future periods. Periodic changes in the fair value of the Failed Auction Security attributable to credit loss (i.e., risk of the issuer’s default) are recorded through earnings as a component of “Other income (expense), net”, with the remainder of any periodic change in fair value not related to credit loss (i.e., temporary“mark-to-market” carrying value adjustments) recorded in “Accumulated other comprehensive (loss) income”, a component of Stockholders’ Equity. Should we conclude a decline in the fair value of the Failed Auction Security is other than temporary, such losses would be recorded through earnings as a component of “Other income (expense), net”. We do not believe there was an “other-than-temporary” decline in value in this security as of June 30, 2018.March 31, 2019.
Our exposure to market risk for fluctuations in foreign currency exchange rates relates to the operations of VJCL, for which the functional currency is the Japanese Yen, and changes in the relative value of the Yen to the U.S. Dollar. The functional currency of all other subsidiaries in Europe and other subsidiaries in Asia is the U.S. Dollar. While we believe risk to fluctuations in foreign currency exchange rates for these subsidiaries is generally not significant, they can be subject to substantial currency changes, and therefore foreign exchange exposures.
Item 4 — Controls and Procedures
(a) Disclosure regarding controls and procedures.
As required byRule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management, with the participation of our Chief Executive Officer (“CEO”) (who is our principal executive officer) and Chief Financial Officer (“CFO”) (who is our principal financial officer), conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the last fiscal quarter (i.e., June 30, 2018)March 31, 2019). The term “disclosure controls and procedures,” as defined inRules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure information required to be disclosed by a company in the reports it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2018,March 31, 2019, our CEO and CFO concluded, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Accordingly, management, including the CEO and CFO, recognizes our disclosure controls or our internal control over financial reporting may not prevent or detect all errors and all fraud. The design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the
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Vicor Corporation
March 31, 2019
likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any control’s effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
(b) Changes in internal control over financial reporting.
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Vicor Corporation
June 30, 2018
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2018,March 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II – Other Information
June 30, 2018March 31, 2019
See Note 12.Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 – “Financial Statements.”
There have been no material changes in the risk factors described in Part I, Item 1A – “Risk Factors” of the Company’s Annual Report on Form10-K for the year ended December 31, 2017.2018.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VICOR CORPORATION | ||||||
Date: | By: | /s/ Patrizio Vinciarelli | ||||
Patrizio Vinciarelli | ||||||
Chairman of the Board, President and | ||||||
Chief Executive Officer | ||||||
(Principal Executive Officer) | ||||||
Date: | By: | /s/ James A. Simms | ||||
James A. Simms | ||||||
Vice President, Chief Financial Officer | ||||||
(Principal Financial Officer) |
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